You can use the online calculator from BankingMyWay.com to help sort out how the different rates would affect your monthly payments.
In addition to FRMs and ARMs, the calculator offers the ability to calculate payments on an interest-only ARM (as opposed to the more common fully amortizing ARM). However, the interest-only option should only be considered in specific (and, these days, rare) situations, particularly where home values are rising rapidly.
To use the calculator, you'll need to know the amount and term of your loan, as well as the interest rates offered and details about the rate resets on the ARM.
Say you want to buy a $300,000 home with a $240,000 mortgage. You have the choice between a 30-year FRM at 6.63% and a 5/1 ARM at 6.16% with a 13% rate cap, meaning that your interest rate can't ever exceed 13%. You expect the rate on the ARM to increase by a quarter of a percentage point each year.
Based on those numbers, you would face monthly principal and interest payments of $1,537.54 for the FRM, while you'd pay $1,463.70 for the ARM -- a savings of $886.08 per year, or $4,430.40 over the first five years of the loan.
What's more, the initial savings from the lower rates on the ARM will cover the first few years of rate hikes, until your rate gets high enough that you would have been smarter to go with a FRM in the first place. The calculator calls this date the break-even point, which is really the length of time you can live in your home and have the ARM be the right choice as a mortgage instrument.
