Option ARM Calculator
An option (pick-a-payment) ARM lets you choose among several payment levels — but the minimum payment can cause your balance to grow. See all the options.
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
- $400,000
- Note interest rate
- 6.50%
- Minimum-payment rate
- 2.50%
- Loan term (years)
- 30
adds $586.18/mo to your balance
- Minimum payment$1,580.48
- Interest-only$2,166.67
- 30-year payment$2,528.27
How the minimum 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 | Minimum payment | Minimum payment |
|---|---|---|
| $200,000 | $790.24 | $790.24 |
| $300,000 | $1,185.36 | $1,185.36 |
| $400,000 | $1,580.48 | $1,580.48 |
| $600,000 | $2,370.73 | $2,370.73 |
| $800,000 | $3,160.97 | $3,160.97 |
The math behind it
This models a pick-a-payment loan by computing several payment options on the same balance: a minimum payment based on a low teaser rate, an interest-only payment at the note rate, and fully amortizing 30-year and 15-year payments. It then projects what happens if you pay only the minimum. Because that minimum can be less than the interest actually owed at the note rate, the shortfall is added back to your balance each month — negative amortization — and the projection shows the balance growing over five years toward a recast.
Assumptions & limits
- The minimum payment is calculated at the low minimum-payment rate you set, which is typically below the real note rate.
- Negative amortization occurs when the minimum payment is less than the interest owed at the note rate; the difference is added to principal.
- The projection assumes you pay only the minimum through a typical five-year recast to illustrate the worst-case balance growth.
- Payment caps, periodic recasts, and balance caps that real option ARMs impose are simplified here.
- Taxes, insurance, and PMI are not included.
Source: Freddie Mac PMMS via FRED. Annual averages; latest weekly reading shown.
Common questions
What is negative amortization?
It is when your payment does not cover the interest charged, so the unpaid interest is added to your loan balance and you owe more than you borrowed. Option ARMs allow this when you choose the minimum payment. The calculator projects how fast the balance can grow if you keep paying only the minimum.
Why is the minimum payment risky?
The minimum is set at a low teaser rate and often does not cover the true interest. Paying it feels affordable but quietly increases what you owe, and lenders recast the loan after a few years or once the balance hits a cap — at which point the required payment can jump sharply. The minimum is rarely the smart choice.
Are option ARMs still available?
They are far less common than before the 2008 financial crisis, when their payment-shock and negative-amortization features caused widespread trouble. This calculator is useful mainly for understanding the mechanics and the risk if you encounter one.