Adjustable rate mortgages (ARMs) have never been as popular as they are today, thanks to the introduction of so-called “hybrid” ARMs. Hybrid ARM products combine the adjustable and fixed rate mortgage structures into one. These products start with a set period of time in which the interest rate is fixed, before converting to a variable interest rate structure, where the rate can be adjusted or “reset” at set intervals.
A 5/1 Adjustable rate mortgage is one of today’s more popular hybrid ARM products. 5/1 ARMs have an initial period of 5 years for the interest rate to remain fixed. When the introductory period expires, the rate then shifts into an adjustable interest rate. During this adjustable period, resets are made annually (every 1 year). This gives homeowners 5 years, or 60 months, to enjoy lower than average interest on their monthly mortgage payments, before buckling down and tackling the increased “adjusted” monthly payments or refinancing to a fixed rate mortgage.
It is important to note that hybrid ARMs like the 5/1 ARM are still 30-year loans unless specifically stated otherwise. The attractive quality that these loans share is that for the initial fixed rate period, the fixed interest rate is lower than you would get with a traditional fixed rate mortgage. That is why many borrowers get hybrid ARMs, and then refinance after the fixed rate period ends.
Is a 5/1 Adjustable Rate Mortgage (ARM) Right for Me?
Many borrowers are unsure whether or not an adjustable rate mortgage is worth the risk. With a hybrid ARM, so long as you are in a position to refinance after the initial fixed-rate period, they most definitely are. 5/1 ARMs, in particular, offer a decent amount of time to make some quick savings on your monthly mortgage payments, since they tend to have significantly lower interest rates than the average 30-year fixed rate mortgage. In general, a rule with hybrid ARMs is that the shorter the fixed rate period, the better the initial rate. 5/1 ARMs have the second shortest initial fixed rate period.
Borrowers of 5/1 ARMs have a full 60 months of substantially reduced monthly mortgage payments to save some money or to slowly bring down their principal amount (providing there are no prepayment penalties). This situation is ideal for home buyers who would like to invest their money elsewhere while still being able to afford to buy a home.
Like the other hybrid ARM products, the 5/1 ARM is not recommended for borrowers who may be unwilling or unable to refinance or sell their home if the adjusted monthly mortgage payments are outside of their affordable price range. Conversely, if a borrower is only looking to temporarily settle in one place, the 5/1 ARM is an option that could very well give them a highly competitive monthly mortgage payment amount, thanks to the amazing interest rate during the fixed rate period.
5/1 Adjustable Rate Mortgages: In Review
If you’re a home buyer looking to score some huge savings at the beginning of your loan term, then adjustable rate mortgages might be just what the doctor ordered. Just remember, if you decide to get a 5/1 ARM, those savings only last for the duration of the initial 5 year fixed rate period, and then you either have to shell out the extra cash each month to cover the larger monthly payments after the rate is adjusted (which it almost certainly will), or refinance your mortgage if you are eligible to do so.
The rates during the initial fixed rate period for a 5/1 ARM are admirably low, so all things considered, it may be your best way to save some money. If you need help figuring out if a 5/1 ARM is right for you, don’t hesitate to reach out to us and speak with a home.loans mortgage expert. We’ll help find the absolute best mortgage solution for you, completely risk-free.