A 5/1 ARM is an adjustable rate mortgage that has a fixed rate for the first five years of the loan. The payments are based on a 30 year term. The first five years of the loan feel like a fixed rate loan. Once this period has been reached, the loan will begin to adjust every year. There is usually a maximum adjustment cap of 6 percent more or less than the original rate for the life of the loan. However, the adjustments will be once or twice a year and can either increase, or decrease, depending on economic market conditions.
5/1 ARM Benefits
You may want to use a 5/1 ARM if you intend to live in your home for less than five years. By choosing this type of mortgage, your payment will be lower since the initial five-year interest rate is less than a conventional 30 year loan rate. If the home is not sold before the five year fixed portion of the loan is reached, you can either refinance or keep the loan as an adjustable rate until you sell the house. Another benefit of using a 5/1 ARM is you may be able to purchase a larger home, because of the lower interest rate.