ARM & Interest Only ARM vs. Fixed Rate Mortgage
Compare three options on the same loan: a fixed-rate mortgage, a fully-amortizing ARM, and an interest-only ARM — each with a very different initial payment.
A worked example
Running this tool on current national benchmarks (Federal Reserve / Freddie Mac via FRED (St. Louis Fed)) — swap in your own numbers to see how the result moves.
- Loan amount
- $350,000
- Loan term (years)
- 30
- Fixed rate
- 6.75%
- ARM rate
- 5.75%
the interest-only ARM, building no equity
- Fixed-rate payment$2,270.09
- Amortizing ARM$2,042.50
- Interest-only ARM$1,677.08
How the lowest initial payment changes with loan amount
Holding the other inputs at the example above, here is how the result moves as loan amount changes.
| Loan amount | Lowest initial payment | Fixed-rate payment |
|---|---|---|
| $175,000 | $838.54 | $1,135.05 |
| $275,000 | $1,317.71 | $1,783.64 |
| $350,000 | $1,677.08 | $2,270.09 |
| $525,000 | $2,515.63 | $3,405.14 |
| $700,000 | $3,354.17 | $4,540.19 |
The math behind it
The calculator prices the same loan three ways. The fixed-rate payment amortizes the loan at your fixed rate over the term. The amortizing ARM does the same at the lower ARM rate. The interest-only ARM payment is just the loan balance times the ARM rate divided by 12 — pure interest, so no principal is repaid and the balance stays flat. It then charts all three balances over time so you can see which builds equity.
Assumptions & limits
- Rates are held constant for the whole term in each scenario — the ARM's later reset is not modeled here, so the ARM and interest-only lines assume the intro rate persists.
- The interest-only payment covers interest only; the balance never falls, so you build no equity from payments.
- All three options use the same loan amount and term. Payments are principal and interest (or interest only) — taxes, insurance, and mortgage insurance are excluded.
- This is a payment and balance comparison, not a full cost projection with rate changes over time.
Source: Freddie Mac PMMS via FRED. Annual averages; latest weekly reading shown.
Common questions
Why is the interest-only ARM payment so much lower?
Because you pay only the interest and none of the principal. That strips the loan-repayment portion out of the monthly bill, which is why the interest-only ARM shows the lowest payment of the three — and why its balance never shrinks.
What is the catch with interest-only or ARM payments?
Two risks stack up. The ARM rate can reset higher after the fixed period, and the interest-only structure builds no equity, so you owe the full balance for as long as the interest-only period lasts. If both hit at once, the payment can jump sharply while you still owe what you borrowed.
Who is each option best for?
The fixed rate suits buyers who want certainty and plan to stay. The amortizing ARM fits those confident they will move or refinance before the reset. The interest-only ARM is a cash-flow tool for borrowers with irregular income or a clear plan to pay down principal later — it is the riskiest of the three.