5-1 ARM (Adjustable Rate Mortgage)Updated on 5/29/2013
A 5/1 ARM, or adjustable rate mortgage, is a mortgage in which the initial mortgage rate of the loan remains fixed for a period of 5 years. After this period, the rate begins to shift up or down depending on changes in the mortgage marketplace. ARM rates are pegged to an interest rate index, often the current prime rate. After the initial 5 year period, the interest rate on the loan will adjust upward or downward at regular intervals, following this index.
What is the benefit of this? Simply put, a 5/1 ARM comes at a lower rate than a conventional fixed mortgage. You’ll be given a highly favorable low rate for the first 5 years, which allows many homebuyers to recoup costs and expenses or save money for later bills.
You’ll likely end up paying a higher interest rate once the initial rate begins to adjust. It’s rare that an adjustable rate mortgage would shift downward at the end of the initial period. Be prepared to make higher payments. Many borrowers have been taken by surprise with significantly higher payments after the first five years.