Adjustable-rate mortgage calculator: See how higher rates change your payment - CNBC

With 30-year fixed mortgage rates stuck above 7% since mid-September, more homebuyers are turning to adjustable-rate mortgages seeking lower monthly payments.

The appeal is simple. ARMs typically offer lower interest rates, at least initially, than traditional 30-year fixed-rate mortgages. And lately, the discount has been substantial. The average rate on an ARM with a 5-year fixed rate that adjusts each year after was 6.41% in late October, nearly a full percentage point below the average 30-year fixed rate of 7.37%, according to the Mortgage Bankers Association. That difference can save many borrowers hundreds of dollars a month during that initial fixed-rate period.

That helps explain why ARMs have grown from 8% of mortgage applications in early September to 11.3% in late October, per MBA data.

But the lower rate comes with a catch. Unlike a traditional fixed-rate mortgage, an ARM typically locks in its initial rate for only a short period; often five, seven or 10 years. After that, the rate can adjust periodically based on changes in a benchmark interest rate, potentially increasing the borrower's monthly payment.

For some borrowers, the gamble is that mortgage rates will fall enough for them to refinance into a fixed-rate mortgage before their ARM adjusts. That way, they could enjoy the lower payments now and lock in a great fixed rate later.

But if rates rise instead, they could be stuck with much higher monthly payments they can't afford.

"Refinancing should be treated as an upside scenario, not an exit strategy, because neither lower rates nor loan approval at that future date is guaranteed," says Michael Young, director of home lending at Wealthfront.

That's why experts recommend stress-testing an ARM before signing, to make sure you could still afford the monthly payments if rates rise.

Start by comparing the monthly payment on an ARM with what you'd pay on a traditional 30-year fixed mortgage.

For example, a $400,000 mortgage with a 30-year fixed rate of 7.37% would cost about $2,761 a month in principal and interest.

At an ARM rate of 6.41%, that payment would fall to about $2,505, saving roughly $256 a month, or $15,400 over the first five years.

But those savings aren't guaranteed to last. After the introductory period, an ARM's interest rate can rise, subject to limits known as rate caps.

For example, a five-year ARM starting at 6.41% could rise to 8.41% in year six and 9.41% in year seven, under common rate caps. If the rate stayed at 9.41% through year 10, the borrower would pay roughly $10,250 more over the first decade of the mortgage than someone who chose the 30-year fixed mortgage, even after accounting for the initial savings.

And even if mortgage rates fall, refinancing isn't guaranteed. Borrowers must qualify for a new loan, and changes in income, employment or home equity could make that harder.

The calculator below lets you see how rising rates could affect your mortgage costs and whether refinancing into a fixed-rate mortgage would save you money. It also shows that even if mortgage rates fall, refinancing isn't always a slam dunk. Closing costs can eat into the savings from a lower rate.

For example, refinancing from a 6.41% ARM into a 6% fixed-rate mortgage after five years could cost about $2,000 more than keeping the ARM, assuming its rate stays unchanged, under the calculator's assumptions. 

Still, that extra cost may be worth the peace of mind of knowing your mortgage rate won't rise in the future. Ultimately, the sweet spot for refinancing depends on how far rates fall, the closing costs involved and how much risk you're comfortable taking, says Nick Panize, president of Westgate Capital Ventures, a commercial mortgage lender and brokerage.

"If the client is saving meaningful money for the first five to seven years and can comfortably handle the loan if rates are higher when it adjusts, then you have a pretty good argument for taking the ARM," he says. "If rates fall and you refinance, that's just an added benefit."

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