- 5/1 ARM home loan – first 5 years same interest rate, then adjusts each year after
- ARMs can have minimum and maximum interest rate amounts
- 5/1 ARM can be great for short-term purchases
What is a 5/1 ARM?
A 5/1 ARM (Adjustable Rate Mortgage) combines elements of a fixed rate loan and an ARM, so let’s recap those two loans first.
Fixed Rate Loan – A loan where the interest rate will stay the same during the life of the loan.
Adjustable Rate Mortgage (ARM) – The interest rate changes throughout the loan, but when and how much depends on your specific loan.
During the first 5 years, of your 5/1 ARM, you would have a fixed interest rate. Then after 5 years, depending on your loan parameters, it would adjust once every year for the remainder of the loan. Starting with a fixed rate for the first few years and then going into an adjustable schedule is common.
Adjustable Rate Mortgages have what’s called floors and caps. These are set parameters to keep your interest rate inbetween the floor (lowest rate) and cap (highest rate).
Regardless of the market, your rate won’t drop below your floor amount nor go above your cap.
Let’s say your starting rate was 4.05% (see today’s rates) for the first 5 years. Then it adjusted to 5.05% for the next year term. Luckily, your cap is at 6% so even if rates continue to rise yours will only adjust up to your max.
What are the benefits of a 5/1 ARM?
Like a chocolate-covered pretzel is a great combination of sweet and salty; the 5/1 ARM a perfect blend of fixed and adjustable.
Now we all have different flavor preferences, so which type of loan works best for you?
The 5/1 ARM is great for home buyers who plan to move in the short-term. Home owners planning to move within the next 5 to 7 years can have access to more of their money with smaller payments—allowing them to buy a car, pay for college, or pay back student loans. This is possible because with a 5/1 ARM or similarly structured loan the interest rate is normally much lower.
Who else can benefit?
This loan type can work well for a person or family who relocates a lot for work or a young family who plans on purchasing a “starter home”.
After this time frame, they would only have a few years of an adjusting rate before they would move again.
But plans can change, so what happens if you decide to stay longer? Is it possible to change your loan?
Can you refinance a 5/1 ARM?
Yes! Maybe your situation changed and you’ll now be staying in this home longer. However, if you’re looking for more financial stability than what an ARM offers, it’s best to contact your loan officer about the process and your best options.
The beginning of the process involves gathering paperwork and possibly doing a little math. You’ll need to find out how much equity you have in your home.
The other two numbers you’ll want to know is the current value of your mortgage, or how much you have left to pay. The last is your home’s current market value. The best way to figure this out is to see the selling price of homes near you.
Are you interested in learning more about your 5/1 ARM options?
On Q Financial can help answer all of your questions. Our team is here to find the best home loan solution for you.