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Adjustable-Rate Flexibility Dive into the 5-Year ARM Option

A 5-year adjustable rate mortgage (ARM) has a low fixed interest rate for the first 5 years, saving you money compared to a 30-year fixed loan. After that initial period, the interest rate of the loan can change each 6-12 months for the remaining life of the loan, which is typically 25 additional years.

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What is a 5-year ARM?

A 5-year ARM (adjustable rate mortgage) comes with a low introductory fixed interest rate for the first 5 years of the loan, saving you money compared to a 30-year fixed mortgage. After the initial period, the rate can change (adjust) once each six or 12 months for the remaining life of the loan. The full term is typically 30 years.

This type of loan is often listed or displayed as 5/1 ARM. This indicates that the mortgage has a fixed rate for the first five years and then an adjustable rate every (1) year afterward. This is very important to understand because as a result of this adjustable rate, the monthly payment may change from year to year after the first five years.

There is also a 5/6 ARM, meaning the rate can change every six months after the initial fixed-rate period.

There is a newer type of 5-year ARM as well, called the 5/5 ARM. This loan is fixed for five years, then adjust every 5 years thereafter. Homeowners who are worried about their payment changing every 6-12 months could opt for a 5/5 ARM for the peace of mind it brings.

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Special Features

  • More affordable homeownership: ARM loan programs offer lower rates during the first part of the loan compared to 30-year fixed mortgages. As of July 2022, the average 5-year ARM rate was 1.01% below the 30-year fixed average rate, according to Freddie Mac. That’s a $180-per-month discount on a $300,000 loan and would save a homeowner nearly $11,000 in the first five years of the loan.
  • Limits on rate increases: ARMs come with consumer protections called interest rate “caps.” These are limits on how far and how fast your rate can rise. A 5-year ARM with 2/1/5 caps, for instance, can rise only 2% at first adjustment, 1% at each subsequent adjustment, and no more than 5% during the life of the loan. This ARM, for instance, with a 4% initial rate could never rise above 9%.
  • Conversion: Some ARMs have a special provision that allows for the borrower to convert the ARM to a fixed-rate mortgage at designated periods during the life of the loan.
  • The rate could drop: If market rates drop during the adjustment period, your payment could go lower. A fixed-rate loan requires a refinance and thousands of dollars in fees to capture lower market rates. An ARM will float downward with the market if rates drop after the initial fixed period.

FAQ about 5 Year ARM

Why are they considered Hybrid Mortgages?

The 5 Year Arm or 5/1 ARM is considered a hybrid mortgage. This means that the loan combines the features of a fixed-rate mortgage (the first five years) and an adjustable-rate mortgage (for the remaining years).

What are the benefits of a 5 Year ARM?
How does an ARM work?