5/1 Hybrid Floating Rate (5/1 ARM) mortgage loan begins with an initial 5-year fixed rate term followed by an annual interest rate adjustment. Among the terms, 5 refer to the year in which the fixed interest rate is applied, and 1 refers to the frequency at which interest rates are adjusted thereafter (once a year). As a result, after 5 years, your monthly payments can sometimes increase dramatically.
look at a glance
— A 5/1 hybrid adjustable rate (ARM) mortgage offers an initial fixed rate for 5 years, after which the rate is adjusted annually.
— As the ARM adapts, the interest rate changes according to the index associated with the marginal interest rate.
— Homeowners typically enjoy lower mortgage repayments during the introduction period.
How a Hybrid Adjustable-Rate Mortgage (5/1 Hybrid ARM) Works
A 5/1 hybrid ARM adjustable-rate mortgage may be the most popular type of loan, but it is not the only option. Also contains 3/1, 7/1, and 10/1 ARM. These loans provide an initial fixed rate for 3, 7 and 10 years, respectively, followed by an annual adjustment.
Also known as 5-year fixed-term ARM or 5-year ARM, these mortgages have an index-adjusted rate and a margin. Hybrid ARMs are very popular with consumers because they may have much lower starting interest rates than conventional fixed rate mortgages. Most providers offer at least one version of these hybrid ARMs, of which 5/1 hybrid ARMs are particularly popular.
There are other ARM structures, such as 5/5 and 5/6 ARM, which have tariff adjustments every 5 or 6 months, in the early stages of 5 years. In particular, the 15/15 ARM is adjusted once every 15 years and the loan term remains unchanged. 2/28 and 3/27 ARM are rare. In the former case, a fixed interest rate is applied only for the first two years, followed by a
variable interest rate of 28 years. In the latter case, the fixed interest rate is adjusted every 3 years and every 27 years. Some of these loans are not adjusted annually but are reconciled every six months.
Example of a 5/1 Hybrid ARM
The interest rate changes according to the marginal interest rate as the ARM adjusts according to the index to which it is linked. If the margin of the 5/1 hybrid ARM is 3% and the index is 3%, it is adjusted to 6%.
However, the extent to which fully indexed interest rates on 5/1 hybrid ARMs can be adjusted is often limited by interest rate caps. A fully indexed interest rate can be linked to several different indices, and while these numbers vary, the margin is fixed over the life of the
Borrowers can save significant amounts on their monthly payments with a 5/1 hybrid ARM. Assuming a home purchase price of $300,000 and a down payment of 20% ($60,000), a very good/great borrower can get 50 to 150 basis points on a loan and save more than $100 per month in payouts of $240,000 loans. Of course, that rate can go up, so expect borrowers to see their monthly payments increase and be ready to sell or refinance their home when interest rates rise.
Advantages and Disadvantages of a 5/1 Hybrid ARM
In most cases, ARM offers lower introductory rates than traditional fixed rate mortgages. These loans are ideal for buyers who only live for a short period and want to sell before the end of the introduction period. The 5/1 Hybrid ARM is also suitable for buyers planning to refinance before the discount rate expires. However, hybrid ARMs like 5/1 tend to have higher interest rates than standard ARMs.
— Lower introduction rate than traditional fixed rate mortgages
— Interest rates may be lower before the mortgage is adjusted, which may result in lower payments.
—Suitable for buyers who will live in the house for a short period of time.
— Interest rates higher than standard variable rate mortgages (ARMs)
— Interest rates are likely to rise when mortgages are adjusted.
— Personal issues or market forces may cause excessive rate hikes.
The adjustment may lower interest rates and possibly reduce the borrower’s monthly payments. However, in many cases interest rates rise and the borrower’s monthly payments increase.
If a borrower joins ARM with the intention of selling or refinancing the mortgage before the
interest rate is reset, personal finance or market forces may maintain their credit and potentially expose them to unaffordable interest rate increases. Consumers considering an adjustable mortgage loan should read How It Works.