Understanding ARM vs Fixed Rate
Real-world scenario: Loan $350,000 / 360 months; fixed 6.5%; ARM intro 5.25%.
What is ARM vs Fixed Rate?
An introductory payment compare for educational shopping. It is not a full ARM lifetime cost model with caps, indexes, or margins.
- Same principal and term
- Intro rate only for the ARM side
- No reset path modeled
The Formula
Intro Payment Gap
Gap = EMI_ARM − EMI_Fixed
Worked Example
Scenario: Loan $350,000 / 360 months; fixed 6.5%; ARM intro 5.25%.
Step 1: EMI_fixed at 6.5%
Step 2: EMI_arm at 5.25%
Step 3: Gap = ARM − Fixed
Answer: Gap is negative when the intro ARM payment is cheaper.
Common Use Cases
- Offer screens: teaser vs fixed
- Payment budget: can you afford fixed?
- Risk talk: savings today vs reset risk
Pro Tips
- Ask for fully indexed rate after intro
- Caps matter more than the teaser
- Stress-test a higher future ARM rate separately
Limitations: ARM vs Fixed Rate results are educational finance aids—not loan offers, lease contracts, refinance quotes, or tax advice. Confirm figures with lenders and a qualified professional.
FAQ
Does this include future ARM adjustments?
No. Re-run with a higher assumed rate to stress the post-intro payment, or ask your lender for a lifetime illustration.
What does a negative result mean?
The ARM intro EMI is lower than the fixed EMI by that amount each month (during the intro period).
Authoritative References
For consumer finance education, consult:
- CFPB — mortgages, credit cards, and consumer lending
- FTC — consumer protection basics
- Investopedia — loan and lease explainers