Adjustable-rate Amortization Schedule
An amortization schedule for adjustable-rate mortgages operates on the same basic principle as for fixed-rate mortgages. The monthly payment is calculated based on the loan balance, interest rate and number of amortization periods (usually 30 years).
There is, however, one important difference: whenever the interest rate changes, an ARM's monthly payment must be recalculated to take that into account.
To illustrate the point, the following example shows the first year of amortization on a $150,000 one-year ARM with a 30-year term, at an initial interest rate of 4%. The first-year monthly payment, $716.12, is broken out as follows.
| Month | Monthly Principal | Monthly Interest | Principal Balance |
|---|---|---|---|
| 1 | 216.12 | 500.00 | 149,783.88 |
| 2 | 216.84 | 499.28 | 149,567.03 |
| 3 | 217.57 | 498.56 | 149,349.47 |
| 4 | 218.29 | 497.83 | 149,131.18 |
| 5 | 219.02 | 497.10 | 148,912.16 |
| 6 | 219.75 | 496.37 | 148,692.41 |
| 7 | 220.48 | 495.64 | 148,471.93 |
| 8 | 221.22 | 494.91 | 148,250.71 |
| 9 | 221.95 | 494.17 | 148,028.76 |
| 10 | 222.69 | 493.43 | 147,806.06 |
| 11 | 223.44 | 492.69 | 147,582.63 |
| 12 | 224.18 | 491.94 | 147,358.45 |
The first year of an amortization schedule looks very similar to that of a fixed-rate loan.
Now let's suppose that at the end of the first year, the interest rate rises to 5%. When this happens, the monthly payment must be recalculated based on the new rate and the current mortgage balance, amortized over the remaining term of the loan (29 years, or 348 months). Now the monthly payment is $802.90, broken out as follows:
| Month | Monthly Principal | Monthly Interest | Principal Balance |
|---|---|---|---|
| 13 | 188.90 | 613.99 | 147,169.55 |
| 14 | 189.69 | 613.21 | 146,979.85 |
| 15 | 190.48 | 612.42 | 146,789.37 |
| 16 | 191.28 | 611.62 | 146,598.10 |
| 17 | 192.07 | 610.83 | 146,406.03 |
| 18 | 192.87 | 610.03 | 146,213.15 |
| 19 | 193.68 | 609.22 | 146,019.48 |
| 20 | 194.48 | 608.41 | 145,824.99 |
| 21 | 195.29 | 607.60 | 145,629.70 |
| 22 | 196.11 | 606.79 | 145,433.59 |
| 23 | 196.92 | 605.97 | 145,236.67 |
| 24 | 197.74 | 605.15 | 145,038.92 |
With ARMs, every time there is an interest rate adjustment, the monthly payment must be recalculated as shown above and the amortization schedule changes, respectively.
Understanding how monthly mortgage payments and amortization are calculated helps in a number of ways:
- How a borrower's mortgage payments work, e.g., how much of the monthly payment is applied to interest vs. principal
- How fast can a borrower pay down principal
- How monthly payments are calculated (and recalculated) on an adjustable-rate mortgage