How to Calculate Adjustable Rate Mortgage in Excel

Are you looking to calculate the payments on your adjustable rate mortgage in Excel? Whether you’re a first-time homebuyer or a seasoned homeowner, understanding your mortgage payment and how it can change over time can be challenging. With Microsoft Excel, however, calculating your adjustable rate mortgage (ARM) payment is simple, quick, and accurate. In this blog post, we’ll walk you through step-by-step instructions on how to calculate your ARM payment in Excel, so you can stay on top of your finances.

What is an Adjustable Rate Mortgage (ARM)?

Before we dive into calculating your ARM payment in Excel, let’s first define what an adjustable rate mortgage is. An ARM is a type of mortgage that has an interest rate that can change periodically, usually every year after an initial fixed interest rate period. The rate adjustment is based on an index plus a margin. This means that your monthly payment could increase or decrease, depending on the current index rate and the terms of your loan agreement.

Calculate Your ARM Payment in Excel: Step by Step Guide

Step 1: Set Up Your Excel Spreadsheet

The first step in calculating your ARM payment in Excel is setting up your spreadsheet. In a new workbook, create a table with the following columns: Payment Number, Payment Amount, Interest Rate, Principal Payment, Interest Payment, and Loan Balance.

Step 2: Determine Your Loan Details

Before you start entering data, you need to know your loan details, including your loan amount, interest rate, and loan term. This information should be available on your loan documentation.

Step 3: Determine Your Initial Payment

The initial payment on an ARM is based on the fixed interest rate and the loan amount. You can use Excel’s PMT function to calculate this. In the Payment Amount column, enter =PMT(interest rate/12, loan term*12, loan amount).

Step 4: Calculate Your Interest Rate Adjustments

Your interest rate can change periodically, depending on your loan agreement. In the Interest Rate column, enter your initial interest rate. For subsequent periods, you will need to enter the new rate based on your loan adjustment period.

Step 5: Calculate Principal and Interest Payment

Each payment made on an ARM includes both principal and interest. In the Principal Payment column, enter =PPMT(interest rate/12, payment number, loan term*12, loan amount). In the Interest Payment column, enter =IPMT(interest rate/12, payment number, loan term*12, loan amount).

Step 6: Calculate Your Loan Balance

As you make payments on your loan, your loan balance decreases. You can calculate your loan balance for each payment period by subtracting the principal payment from the previous loan balance. In the Loan Balance column, enter =loan balance – principal payment.

Calculating your ARM payment in Excel is a straightforward process that can help you better understand your mortgage payments and your loan balance. By following these steps and using Excel’s built-in functions, you can track your payments and make informed financial decisions.

Benefits of Using Excel to Calculate Your ARM Payment

Using Excel to calculate your adjustable rate mortgage payment offers several benefits, including:

• Accuracy – When calculating complex mortgage payments, utilizing Excel’s built-in functions allows for precise and accurate calculations.
• Flexibility – Excel allows for the customization of payment schedules, interest rates, and other details, making it easy to model different scenarios and compare mortgage products.
• Organization – Keeping track of your loan balance and payment history can be tedious, but using Excel allows you to create detailed and organized records of your information.

ARMs vs. Fixed-Rate Mortgages

Adjustable rate mortgages are often compared to fixed-rate mortgages, which have a steady interest rate for the life of the loan. While fixed-rate mortgages may offer more peace of mind and predictable payments, adjustable rate mortgages can be beneficial in particular situations. For example, if interest rates are high when you initially take out a loan, an adjustable rate mortgage can give you a lower initial payment, with the possibility of increasing later when rates decrease.

What to Consider When Shopping for an ARM

When shopping for an adjustable rate mortgage, there are a few key factors to consider:

• Interest rate cap – Look for a cap on how much your interest rate can increase over the life of your loan.
• Index – The index your ARM is tied to can significantly impact your payments. Make sure to understand how the index works and how it can fluctuate.
• Margin – The margin is a percentage added to the index to determine your interest rate. A lower margin can result in a lower monthly payment.
• Adjustment period – Determine how frequently your interest rate can change and how that will affect your payment.

Final Thoughts

Understanding the complexities of adjustable rate mortgages can be a challenge, but Excel can be an incredible asset in modeling and calculating your payments. By following the step-by-step guide above, you can confidently calculate your ARM payment and make informed decisions about your finances. Remember to consider the pros and cons of adjustable rate mortgages when shopping for a loan and research the details to ensure that you are getting the best product for your individual needs.

FAQs

Here are some frequently asked questions regarding the calculation of an adjustable rate mortgage in Excel:

What is the advantage of using Excel to calculate my mortgage payment?

Excel can provide accurate and flexible calculations, and it allows for detailed tracking and organization of payment history and loan balance. Plus, you can easily compare different scenarios and mortgage products to see which one is right for you.

How do I find the interest rate for my adjustable rate mortgage?

Your loan documentation should include details on your interest rate. It may also be available through your lender or online account portal.

What factors determine the interest rate on my ARM?

Your ARM’s interest rate may be influenced by the market index it is tied to, your loan term, and the margin above the index rate. Your lender will confirm your interest rate before you close on your loan.

How often can my interest rate adjust?

Your loan agreement will specify how frequently your interest rate can adjust. It may be every year, every three years, or another period.

How can I calculate my ARM payment if my interest rate changes?

You can use Excel’s built-in PMT, PPMT and IPMT functions to calculate your ARM payment, even when the interest rate changes. Follow the step-by-step guide in this blog post to achieve accurate results.