Fixed Rate Mortgage vs. LIBOR ARM
Compare a fixed-rate mortgage with an index-based ARM (historically tied to LIBOR, now SOFR). The ARM rate equals an index plus a margin.
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
- $320,000
- Loan term (years)
- 30
- Fixed rate
- 6.75%
- ARM initial rate
- 5.50%
- Index rate (e.g. SOFR)
- 4.50%
- Margin
- 2.75%
- ARM intro period (years)
- 5
index 4.50% + margin 2.75%
- ARM initial payment$1,816.92
- Fixed payment$2,075.51
- ARM at fully-indexed rate$2,182.96
The math behind it
The ARM's rate after its intro period is built as an index plus a margin — historically LIBOR, now typically SOFR. The calculator adds your index rate and margin to get the fully-indexed rate, prices the ARM at its intro rate during the fixed period and at the fully-indexed rate afterward, and amortizes it across both phases. It compares that against a fixed-rate loan on payment and lifetime interest.
Assumptions & limits
- The fully-indexed rate is simply the index you enter plus the margin. It assumes the index holds steady at that level after the reset — in reality the index moves, so the actual rate can be higher or lower.
- The ARM resets once, at the end of the intro period, then holds at the fully-indexed rate for the rest of the term.
- Rate caps are not enforced. A real ARM would limit how far the rate can move regardless of where the index sits.
- Payments are principal and interest only. Taxes, insurance, and mortgage insurance are excluded.
Source: Freddie Mac PMMS via FRED. Annual averages; latest weekly reading shown.
Common questions
What is the index plus margin?
After the fixed period, an ARM's rate equals a published index plus a fixed margin set in your loan contract. The index moves with the market; the margin never changes. So if the index is 4.5% and your margin is 2.75%, your fully-indexed rate is 7.25% — the calculator adds them for you.
Why does this say LIBOR when LIBOR is gone?
LIBOR was the dominant ARM index for decades and was phased out in 2023, replaced mainly by SOFR. The mechanics are identical — index plus margin — so the calculator works the same whether your loan uses SOFR, the Treasury index, or any other. Just enter your loan's current index rate.
How risky is the reset if the index rises?
That is the core ARM risk. Your margin is locked, but the index can climb, pushing the fully-indexed rate — and your payment — well above the fixed alternative. Rate caps limit each move and the lifetime rise, but a persistently higher index still means higher payments. Test a higher index here to see the exposure.