What Is a 5/1 Mortgage Loan?

It blends aspects of a fixed-rate and an adjustable-rate loan

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You have many options when it comes to getting a mortgage loan. Not only are there different types of loans (FHA, VA, USDA and conventional), but each loan comes with different rates and terms as well.

There are fixed-rate loans, adjustable-rate loans and, to make things even more confusing, there are also so-called “hybrid” loans, which blend adjustable- and fixed-rate mortgages into one product.

The 5/1 mortgage loan — also called a 5/1 ARM — is one such product.

The 5/1 Arm: What Is It?

A 5/1 ARM (adjustable rate mortgage) combines some aspects of a variable-rate mortgage and a fixed-rate one. The “5” indicates that the loan’s interest rate will remain fixed for the first 5 years of the loan term. After those five years are up, the rate will adjust “1” time per year, until the loan has been repaid.

How much that rate will adjust isn’t set in stone. It may rise or fall, depending on the rate index the loan is tied to. These rate indexes fluctuate often depending on the economy, market conditions and other factors, so there’s no way to predict how a 5/1 loan’s rate will change — or by how much.

How Is a 5/1 Mortgage Loan Different?

The biggest difference between a 5/1 mortgage loan and what most consider the “traditional” mortgage product — a 30-year fixed loan — is that it’s much more unpredictable. On a 30-year fixed-rate loan, you know exactly how much interest you’ll pay for the life of the mortgage, and you have peace of mind that your monthly payment won’t increase (unless your property taxes or home insurance premiums go up).

On a 5/1 loan, you only have that peace of mind for the 5-year fixed period. After that, there’s no telling what your rate will be or how much you’ll pay because of it.

Pros and Cons of a 5/1 ARM

The biggest advantage of a 5/1 ARM is that it comes with a low up-front interest rate — typically much lower than what you’ll get offered on a 30-year fixed loan. That means for those first five years, you’ll be paying a much smaller monthly payment than you would on a longer-term, fixed-rate product. If you’re on a tight budget or need to keep your housing costs low, this can be a big benefit.

The disadvantage is that, on adjustable-rate mortgages, those savings are limited. You can’t count on them for the long haul, and in many cases, you could end up paying significantly more once those 5 years are up.

When Is a 5/1 ARM the Right Choice?

Generally, a 5/1 mortgage loan is a good choice in two scenarios. The first is if you don’t plan to stay in the home long. If you know a career change or move is in the cards before your 5-year fixed period is up, then you’ll save big by getting a 5/1 loan rather than a 30-year fixed one.

You also may want a 5/1 ARM if you know you can comfortably afford a little unpredictability. Just because the fixed-rate period is up in 5 years doesn’t mean your rate will increase dramatically at that point — or even at all. If you have the income to easily cover ebbs and flows in your monthly payment — or to pay the fees for a refinance at that time — then a 5/1 ARM could be a good choice for you as well.

In general, 5/1 ARMs aren’t the right move if you’re tight on cash and need a consistent, reliable payment or if you plan to put down serious roots in the home.

Finding the Right 5/1 ARM

Just like with any loan product, you should shop around for your 5/1 ARM. Get quotes from several lenders and financial institutions, and compare the interest rates and APRs. Make sure you get the full breakdown of terms, too. Many 5/1 ARMs come with rate caps, which mean your rate can never increase past a certain threshold. These caps help protect you from sky-high payment jumps once your 5-year fixed-rate period has expired.