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How to Calculate an Adjustable Rate Mortgage (ARM)
Tutorial 4

An adjustable rate mortgage or "ARM" is a loan that permits the lender to change or "adjust" the interest rate on predetermined dates. The calculator fully supports ARMs by allowing the interest rate adjustment to happen on any date. This tutorial demonstrates how to set up this common financial calculation.

This example applies to our online     Ultimate Financial Calculator. The     C-Value! program for Windows works in a similar way and has a few more features including the ability to save your work.

All users should work through the first tutorial to understand basic concepts about the calculator.

To create a loan schedule with an adjustable interest rate, follow these steps:

  1. Set "Schedule Type" to "Loan"
    • Or click the [Clear] button to clear any previous entries.
    • The top two rows of the grid will not be empty
    • Delete the 2nd row by selecting it and clicking on the [Delete] button
  2. Set "Rounding" to "Adjust last interest" by clicking on the {Settings} {Rounding Options}
  3. In the header section, make the following settings:
    1. For "Calculate Method" select "Normal".
    2. Set "Initial Compounding" to "Daily".
    3. Enter 8.5 for the "Initial Interest Rate".
  1. In row one of the cash flow input area, create a "Loan" series
    1. Set the "Date" to June 25, 2016
    2. Set the "Amount" to 250,000.00
    3. Set the "# Periods" to 1
      • Note: Since the number of periods is 1, you will not be able to set a frequency. If a frequency is set, it will be cleared when you leave the row
  1. Move to the second row of the cash flow input area. Select "Payment" for the "Series" type. For this example, we will assume we want to create a schedule for a 15-year mortgage (180 monthly payments), which has a provision that the nominal annual interest rate can be adjusted every 5 years.
    1. Set the "Date" to July 25, 2004
    2. Set the "Amount" to "Unknown" by typing "U".
    3. Set the "# Periods" to 180. This directs the calculator to calculate the loan as if the interest rate is not going to change. The resulting payment will be based on the original 8.5% interest rate
    4. Use the [Tab] key to tab to Frequency. Select "Monthly".
    5. The "End Date" will automatically be calculated (06/25/2031). 180 monthly periods is 15 years

Your calculator should now look like this:

Adjustable rate mortgage setup
Initial setup for adjustable rate mortgage
  1. Calculate the unknown. The result is $2,484.40
Adjustable rate mortgage setup
Initial regular payment amount
  1. Make the first interest rate change
    1. In row 2, change the "# Periods" of payments from 180 to 60. This sets the calculator so that 5 years of payments are made at the initial interest rate of 8.5%.
    2. Move to the third row of the cash flow input area. Select "Rate Change" for the "Series".
    3. Set "Date" to June 25, 2021
    4. Enter "6.75" for the new nominal annual interest rate.
    5. You could change the compounding option by clicking on "Change Compounding" in the "Series Options" column, but we'll leave it set to "Daily"
  1. Calculate the new payment. Move to the fourth row of the cash flow input area.
    1. Select "Payment" for the "Series"
    2. Set the "Date" to July 25, 2021
    3. Set the "Amount" to "Unknown".
    4. Set the "# Periods" to 120. We set this to 120 because after the 60 payments there are 120 remaining scheduled payments
Interest rate change
First interest rate change & ready to calculate new payment amount
  1. Calculate the unknown. The result is $2,297.59. The payment has decrease due to the interest rate reduction.
New payment
New payment after rate change
  1. Prepare for the next rate change:
    1. In the 4th row, change the "# Periods" of payment from 120 to 60
    2. Move to the 5th row. Select "Rate Change" for the "Series"
    3. Set the date to 07/25/2026
    4. Enter "8.625" in the amount column for the new nominal annual interest rate
  1. Click on the sixth row of the cash flow input area. Select "Payment" for the "Event" type.
    1. Set the "Date" to July 25, 2026
    2. Set the "Amount" to "Unknown"
    3. Set the "# Periods" to 60 since after the previous 120 payments there are 60 remaining scheduled payments
2nd rate adjustment
Second interest rate adjustment
  1. Calculate the unknown. The result is $2,417.81. The payment has increased due to the increase in the interest rate.
Payment change
New payment after rate change
  1. If you want to see a detailed amortization schedule showing the monthly payment allocated between principal and interest, click on the "Schedule" tab above the input area. Click on the [Print Preview] button (after selecting the "Schedule" tab) for an even more detailed schedule.

Below shows the "Schedule" with one of the interest rate changes.

ARM mortgage schedule
ARM Schedule Showing Rate Change & New Payment Amount

Summary: For adjustable rate mortgages & loans, the principal to follow is calculate the payment amount for the number of ALL unknown remaining payments. After the unknown payment amount has been calculated, set the "# Periods" column to the number of payments that are to be made at the particular interest rate. Move to the next row and setup a new rate change. Then move to the next row and enter a new payment series with the amount unknown and the number of payments set to the total number of scheduled remaining payments. Again, calculate the unknown. Repeat until all payment series have been created.

There are dozens of financial calculators on this web site. Some may be quicker to use, but with the exception of the Ultimate Financial Calculator, none allow you to create an adjustable rate mortgage schedule where the interest rate change occurs on a date other than a payment due date.