5/1 ARM Mortgage Rates

Compare today's current mortgage and refinance 5 year ARM interest rates.

Share on facebook
Share on twitter
Share on linkedin
Share on reddit

Savvy borrowers can save serious money in interest–at least in the short term–with adjustable rate mortgages (ARMs). Many home buyers overlook the benefits of this type of loan without really digging in and crunching the numbers. With housing prices high in most areas of the country, any opportunity to save money is worth investigating. The 5/1 ARM is on example of “a penny saved is a penny earned.” Another benefit to the 5/1 ARM is its availability by many banks: by far the most popular ARM, it is offered by most home lenders.

But with a large variety of options in mortgages, it would behoove you to learn the differences between mortgage options to find the best deal for your specific financial needs. Adjustable rate mortgages usually offer the lowest interest rates across home loan products, at times much lower than comparable fixed mortgages. With a variety of ARMs available, let’s delve specifically into the 5/1 ARM.

What is a 5/1 ARM?

Like other ARMs, the 5/1 adjustable-rate mortgage (ARM) is a home loan which has one interest rate for a set period followed by a rate which changes at a specific frequency. The numbers X/Y correspond to the following:

  • First Number (X) is the number of years in which your interest rate is fixed. It will not change during this period, in this case, 5 years.
  • Second Number (Y) is the frequency in which the rate will change after the first period has lapsed. In this case, after the 5-year period has ended, the interest rate will change annually.

Typically, the longer the term, the higher the interest rate. Sitting in the middle of the 10/1 and 3/1 ARMs, the 5-year term is a good compromise in length and interest rate. The 5/1 may not give you the absolute lowest interest rate (like the 3/1) but it normally beats any fixed mortgage.

How does the 5/1 ARM work?

After the fixed rate period (in this case, 5 years), the interest rate (and your monthly payments) will change based on how rates fluctuate, enabling you to save a lot of money each month in the initial fixed term.

As attractive as that initial rate can be, you must be prepared for the rate to change on an annual basis. Then you will be subject to fluctuating interest—and payment amounts. To prevent monthly payments from becoming out of control, many ARMs will include an annual ARM cap, a limit on the interest rate or dollar amount you may have to pay. This protects the borrower from a situation where drastically higher mortgage payments could become unbearable.

The market force on the 5/1 adjustable-rate mortgage

Once the initial 5-year term has ended, the interest rate will change annually, based on certain market factors called the INDEX and the MARGIN. At the end of the fixed rate period (and every year afterwards), the lender considers current market rates and adds the margin amount to determine the new mortgage rate and monthly payment.

INDEX: The index is a complication of different interest rates on the market, expressed as an average. There are several indexes available to lenders, including: Secured Overnight Financing Rate (SOFR), based on the rates that large financial institutions pay each other for overnight loans and is well-respected due to its transparency.

  • Secured Overnight Financing Rate (SOFR), based on the rates that large financial institutions pay each other for overnight loans and is well-respected due to its transparency.
  • Constant Maturity Treasuries (CMT), the monthly one-year CMT value is often tied to ARMs.
  • The Cost of Funds Index (COFI) index is calculated as the sum of the monthly average interest rates for marketable Treasury bills and for marketable Treasury notes, divided by two, and rounded to three decimal places.
  • The London Interbank Offered Rate (LIBOR) is a benchmark interest rate at which major global banks lend to one another in the international interbank market for short-term loans, but due to recent scandals and questions around its validity as a benchmark rate, it is being phased out.

MARGIN: In the business of originating home loans, lenders will add an additional percentage to the index to arrive at your final rate. For example, if you have a margin of 3.25% and your rate adjusts based on the LIBOR index (at 0.1%), your final interest rate would be 3.35%.

The good news is that you can ask a prospective lender upfront about their fees. Part of your mortgage costs will include fees so it’s crucial to know everything that’s included! Most lenders are transparent about these fees—the index they use and their margin—to allow prospective borrowers the opportunity to make a well-informed choice.

Interest rate cap–reducing the risk of steep changes

The idea of an “adjustable rate” may scare off some borrowers, but it doesn’t have to. The rate adjustment is limited, preventing borrowers from a shocking payment increase.  Lenders typically issue caps in three different adjustments, called the initial adjustment, subsequent adjustment, and the lifetime cap. One of the most common ratios for the interest rate caps is 2/2/5. The cap structure is explained here:

  • The initial adjustment cap is applied when the fixed rate period of the 5/1 ARM ends. In the common 2/2/5 example, the lender is limited to adjusting the interest rate no more than 2 percentage points higher than the initial rate, regardless of interest rates at the time.
  • Subsequent adjustment caps come into play each year when the 3/1 ARM interest rate changes. In the 2/2/5 cap, this interest rate is also limited to a maximum 2 percent change over the current rate.
  • The final number in the interest rate cap number is the lifetime cap. At no time during the life of your 5/1 ARM can the interest rate change more than the stated amount; in the case of the 2/2/5 cap, it cannot increase more than five percent.

Important interest rate factors:

Even though the adjustable rate mortgages could offer lower interest rates, you must keep in mind some important financial factors driving all mortgages:

  • FICO score. Your personal financial “reputation” is reflected in your FICO score. A rating of 700+ is considered a good score.
  • Mortgage use. Typically refinance mortgages are slightly higher than purchases.
  • Property Use. Lenders are eager to offer the best rates for primary homes, with higher interest rates for second homes and rental properties.
  • LTV (loan-to-value) Ratio. When you borrow a higher percentage of the home’s purchase price or value, the interest rate is generally higher (you represent a higher risk).
  • Conventional/Low Down Payment. Since ARMs are considered a higher risk loan product, most lenders look for borrowers with a higher down payment.
  • Jumbo vs. Conforming Loans. Jumbo ARM loans exceed the conforming lending limits set by the federal government. Only the highest qualified borrowers are eligible for a Jumbo ARM.
  • Location. Local economic factors can affect mortgage interest rates. A stronger economy means a stable real estate market and lower interest rates, where a less stable economy and real estate market could equate to a higher risk for foreclosure and thus, higher interest rates.
  • Buydown. When borrowers put some money down up front to lower the interest rate, they can save thousands of dollars. This option isn’t always the best choice and one to discuss with your lender.

How long is a 5/1 ARM term?

Contrary to what the name may indicate, the 5/1 ARM has an amortization of 30 years, giving you a 5-year fixed term with a rate adjustment occurring annually for 25 years of the remaining term. Since these correspond to some of the most popular fixed mortgage terms, prospective buyers can truly see how these mortgages stack up to each other.

Is a 5/1 ARM right for you?

Pros:

Lower initial payments. Like other ARMs, you can make out like a bandit when interest rates remain low; and if you make extra payments on the principal during the fixed 5-year period, you can save even more! This will allow you to pay off your mortgage earlier or qualify for better rates if you convert to a different mortgage product.

Flexibility. You can still refinance your home during the 5-year period, especially if rates stay low or drop. You could move to a longer-term ARM or move to a fixed-rate loan if there is a drop in interest rates.

Personalized for your needs. If you know you will only be in a home for a short period of time or your financial situation will improve within the 5-year period, you can plan for that change, taking advantage of the great rates in the short term and be better prepared (and qualified) for lower rates at the end of the fixed term.

Cons:

Potential for higher total interest paid. Once the 5-year fixed term is over, you are at the mercy of current interest rates. If interest rates continue to climb, at the end of the loan, you could have paid a lot more in interest when compared to a fixed rate mortgage.

Risk of increasing mortgage payments.  If interest rates increase after the fixed 5-year period, you will probably experience higher monthly payments. If you maintain a tight budget, this could affect your financial health.

Overall risk. If you are unable to refinance or sell your home at the end of the fixed rate and overall interest rates rise, you may struggle to pay your mortgage or sell your home during a slump.

Interest rate savings may not be high. Its best to compare your options before choosing a 5/1 ARM. Refinancing comes with plenty of costs, so you should be sure the money saved with a lower interest rate ARM isn’t eaten up in refinancing expenses.

An ideal 5/1 ARM consumer

A 5/1 ARM offers borrowers the chance to take advantage of competitive interest rates, and those who foresee a jump in credit score, income, or other factors which make them eligible for better rates can enjoy a shorter commitment to an interest rate.  Further, the 5/1 ARM is a good option for home buyers who are confident they will be selling or refinancing their home within the initial fixed rate period and want to take advantage of an especially low interest rate.

5/1 ARM mortgage rates change daily and are determined by 5 major driving factors which you can control: Property type and use, loan-to-value ratio, your FICO score, and whether you are purchasing or refinancing the mortgage.

Getting the lowest 5/1 ARM jumbo refinance rate depends on 4 main elements: the refinance type (rate/term or cash out), the amount of equity you have in the property, any second mortgages, liens or subordinate financing you already have, and your financial report card.

Jumbo (loan amount >$548,250) 5/1 ARM rates are typically higher than conforming loans. This process should also include comparing loan estimates, having a 740+ FICO score, 60% (or less) loan-to-value, and the property being your primary residence.

Conforming (loan amount <$548,250) 5/1 ARM rates are typically lower than jumbo loans. This process should also include comparing loan estimates, having a 740+ FICO score, 60% (or less) loan-to-value, and the property being your primary residence.

There is some risk in this mortgage, but with risk comes benefits. Like the 7/1 ARM, if you are pretty certain you will be moving–have a significant increase in income—within the initial 5-year period, you can save a ton of money.  Once you reach the period with annual interest rate readjustments, you could see higher OR lower interest rates. Remember, you can always refinance if you aren’t comfortable with this arrangement, and you will have gained a lot of equity in your home in the meantime!

Get started with a purchase or refinance mortgage loan today!

Get started with a purchase or refinance mortgage loan today!

Articles

Articles

Articles

Related searches: Current 5/1 ARM mortgage rates, 5/1 ARM mortgage rates today, best 5/1 ARM mortgage rates, 5/1 adjustable mortgage rates, 5/1 ARM refinance rates, 5/1 ARM jumbo rates, 5/1 ARM jumbo refinance rates, 5/1 ARM conforming rates, 5/1 ARM interest rate chart, average 5/1 ARM rates