Adjustable Rate Mortgage Calculation in Excel

Understanding ARM Calculation

An adjustable rate mortgage (ARM) is a loan with an interest rate that can change periodically. ARMs typically start with lower interest rates than fixed-rate mortgages, making them attractive options when rates are high or for homeowners who plan to sell before rate adjustments.

Initial Setup

To calculate an ARM in Excel, begin by setting up the initial loan details in the spreadsheet. Include the starting principal balance, initial interest rate, and the full amortization period.

Monthly Interest Rate Calculation

Convert the annual interest rate to a monthly rate by dividing by 12. This will be used to calculate monthly payments.

Amortization Schedule

Create an amortization schedule to see how payments are applied to principal and interest over the loan's life. An Excel ARM calculator automates this process and includes extra payment options.

Adjustment Periods

Factor in how often the interest rate will change. For example, a 5/1 ARM rate changes every 5 years, while a 7/1 ARM changes every 7 years. Use Excel formulas to apply rate changes at the correct intervals.

Calculating Monthly Payments

Use the PMT function in Excel to calculate monthly payments based on the changing rates throughout the loan term.

Considering Additional Payments

If additional payments are made, include them in your calculations to determine their impact on the loan's amortization.

ARM Risks

Remember that ARMs can be risky, especially if you plan to own the home for more than 10 years, due to potential increases in interest rates and monthly payments.

Finalizing the Calculation

Ensure that your ARM calculation in Excel is for a fully amortized loan, meaning it will be paid off in full by the end of the term, considering all rate adjustments and additional payments.

Common Use Cases

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  Determining monthly mortgage payments for a new home purchase
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  Comparing different mortgage options to find the most cost-effective choice
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  Forecasting future financial obligations under varying interest rate scenarios
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  Evaluating the impact of early repayments on the overall cost of a mortgage
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  Analyzing the long-term financial implications of refinancing to an adjustable rate mortgage

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