What Is Really a 5/1 Mortgage Loan? What You Need to Know

One type of 30-year ARM (Adjustable-Rate Mortgage) is a 5/1 ARM. The interest rate on this loan changes often. The 5/1 is essential for borrowers because it means two things: the fixed mortgage period, which is the first five years. The 5/6 ARM is another type of mortgage that is often used. It changes each six months later the first time. The interest rate on a 5/1 hybrid ARM is stable for the initial five years—the rate changes every year after that. The phrase "five" refers to the period of decades with an adjusted rate, and the "One" is how frequently the rate changes. So, payments can sometimes go up a lot after five years. A fixed-rate mortgage may be best for homeowners who want to know how much their mortgage payments and interest will cost.

How 5/1 ARM is Adjusted

When you take out the 5/1 ARM, the timer on your adjustment starts to run. So, if you sign the loan papers on July 1, 2022, the interest rate won't change until July 1, 2027. When this happens, the lender recalculates the interest on your loan based on whether the rate has gone up or down. This could make the new rate higher or lower than the actual rate. In exactly one year, your loan will change again, and this will keep happening until the end of the 30 years.

How a 5/1 Hybrid ARM (Adjustable-Rate Mortgage) Works

The most popular method of ARM (Adjustable-Rate Mortgage) is the 5/1 hybrid ARM; however, this is not one. Also, ARMs can have odds of 7/1, 10/1, or 3/1. For the first three, seven, or ten years, the interest rate on these loans stays the same. After that, it changes every year.

This mortgage is also known as a five-year adjusted-period ARM or only a five-year ARM. The change in the interest rate is based on an index and a margin. Hybrid ARMs (Adjustable-Rate Mortgages), or ARMs, are very popular with consumers because their initial interest rates may be much lower than traditional fixed-rate mortgages. Most lenders offer at least one kind of hybrid ARM. The most common of these loans is the 5/1 hybrid ARM.

What's Good and Bad About A 5/1 Hybrid ARM?

Most of the time, the first-rate on an ARM (Adjustable-Rate Mortgage) is lower than that on a traditional fixed-rate mortgage. These loans might be suitable for buyers who only want to live in their homes for a short time and plan to sell before the end of the introductory period. The 5/1 hybrid ARM is also a good option for buyers who want to refinance before the introductory rate ends. Most hybrid ARMs, like the 5/1, have a higher interest rate than standard ARMs.

Pros

• Suitable for people who won't be living in their homes for long
• Start-up rates for traditional fixed-rate mortgages are higher
• If interest rates go down before the mortgage is adjusted, payments could go down

Cons

• When a mortgage's terms change, the interest rates likely go up
• Mortgages with an adjustable rate have higher interest rates than standard mortgages
• They could be stuck with rate increases they can't afford because of personal problems or market forces

Fixed-Rate Mortgage vs. 5/1 Hybrid ARM

A 5/1 hybrid ARM may be what some people want. But for some people, a fixed-rate mortgage may be better. An ARM (Adjusted-Rate Mortgage) has a rate of interest that remains constant throughout the loan's term. The rate is not tied to a benchmark or index rate, and it doesn't change. The interest rate on the first payment and the interest rate on the last payment is the same.

Some people who want a home might benefit from a fixed-rate mortgage. For example, if you want stable and predictable mortgage rates, you might choose a fixed-rate loan instead of a 5/1 hybrid ARM. Putting them side by side can help you choose a mortgage plan.

Is Getting A 5/1 Hybrid ARM A Smart Idea?

A 5/1 hybrid ARM (Adjustable-Rate Mortgage) may be a smart option for persons who do not intend to stay in their home for an extended time or understand they can refinance before the interest rate changes. When interest rates stay low and small changes happen to the index rate, A 5/1 hybrid ARM may save you extra money over time than a fixed-rate mortgage.

But it's important to consider whether you can refinance and what the interest rates might be when you're ready for a new loan. When interest rates rise, upgrading to the latest ARM (Adjusted-Rate Mortgage) and perhaps a new ARM might not save you much money.