# How to Calculate Arm Amortization

An Adjustable Rate Mortgage (ARM) refers to a type of mortgage loan in which the interest rate is variable and the payment schedule can be adjusted over the life of the loan. Amortization is defined as the amount with which the principal depreciates, as payments are made, over the life of the loan. The method for calculating the rate of amortization and the length of time required to reach full amortization of an ARM loan will vary depending on the type of ARM loan, its terms and which payment options are exercised by the borrower. In this article, you will learn the standard arm amortization formula and how to take advantage of the many free, amortization calculators available on the Internet.

## Steps

- 1
**Determine the value of the variables of your ARM loan.**The 3 most common forms of ARM loans are the option ARM, the hybrid ARM and the cash flow ARM. While the characteristics of each loan category will vary, the variables used to determine the amortization of the loan remain the same: M (monthly mortgage payment), P (mortgage principal), I(interest rate) and N (number of months). To determine the variables in the amortization formula, review the loan contract or consult your mortgage broker. - 2
**Use the standard formula to calculate arm amortization.**Once you have determined the amounts of each of the 4 variables (M, I, P and N), you can insert them into the amortization formula. The formula for calculating the amortization of an ARM loan is: A = P(1 + I)n /(1 + I )n - 1.- Reduce the fraction in the equation by calculating the numerator. Add the number of months (N) to the product of the interest rate (I) multiplied by the number of months (N). Now multiply that number by I. The numerator has been reduced.
- Calculate the denominator. Add the number of months (N) to the product of the interest rate (I) multiplied by the number of months (N). The denominator has been reduced.
- Convert the resulting fraction to a whole number and multiply it by the loan principal (P). The resulting figure represents the length of time required to reach full amortization given the terms of the loan.

- 3
**Use an online arm amortization calculator to determine the amortization of your ARM loan.**There are numerous websites on the Internet that offer free online amortization calculators. Enter the amounts of each variable into the corresponding fields in the amortization calculator. The resulting figure will represent the length of time required to reach full amortization given the terms of the loan.

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## Article Info

Categories: Mortgages and Loans