What is a 5/1 ARM?

If you’re like some people, when you hear the mortgage term 5/1 ARM you might say something like, “Ahhhh! Numbers and an acronym—nooooo!!”

Okay, maybe that’s a bit dramatic, but I think it’s fair to say that a 5/1 ARM doesn’t appear to be the friendliest of terms. And that’s really too bad because he’s actually a nice, straightforward guy.
So what is it?

Adjustable-rate mortgages (ARMs) are just that—mortgages with interest rates that adjust depending on market movement. Meaning that if rates go up, your monthly payment will increase, and if they go down, your monthly payment will decrease.

The corresponding numbers tell you how often the rate will change. With a 5/1 ARM, the 5 means that the rate will stay fixed for the first 5 years, and the 1 tells you that it’s subject to change every 1 year after the initial 5.

Don’t wait too long to take advantage of today’s low rate environment.  Contact us today to see if we can save you money on your home payments.
The good

One of the best things about 5/1 ARMs is that they usually have significantly lower interest rates than fixed-rate mortgages. For example, our current rate for a 5/1 ARM is 2.375%, while our 30-year fixed rate is at 3.750%. Not only does the lower rate save you money on your monthly payment, but it also gives you the opportunity to take out a larger loan.

* Rates accurate as of 9/23/15. See below for assumptions.

Of course, they do have the potential to adjust to higher levels, whereas fixed-rates stay at the same level for the life of the loan. However, there are ways to take advantage of the low rate without the risk of a rate hike, such as:

    You plan to move within 5 years, therefore the potential rate increase wouldn’t apply to you
    You think your income will have risen to a level where a rate increase would be insignificant
    You want a lower initial monthly payment than is typically offered by fixed-rate mortgages
    You plan on refinancing out of the ARM before the rate gets adjusted to a higher level (can be a risky option because you can never be certain what rates will be like when you want to refinance)
    You have a crystal ball and it says interest rates will go down in the future

The bad

It’s not always possible to work the system like the above scenarios. And sometimes the rate environment trumps even the cleverest of schemes. So when you’re evaluating your own situation, it’s almost certainly a bad idea to get a 5/1 ARM if:

    Rates are rising
    You do not expect your income to grow substantially

see more: https://www.totalmortgage.com/blog/adjustable-rate-mortgages/what-is-a-51-arm/29866