Understanding How The 5/1 Hybrid ARM Works

Posted on Apr 7 2017 - 1:00am

A Mortgage Broker and a ClientIf you’re on the lookout for an ideal rate for a home purchase, you might want to look into hybrid ARM mortgage loans. These types of loans come with various terms such as 3/1, 5/1, 7/1, and 10/1 adjustable rate mortgages. But the most popular hybrid ARM mortgages is the 5/1 ARM.

What Exactly is the 5/1 ARM?

The 5/1 adjustable rate mortgage is also known as a hybrid home loan since it combines the elements of an ARM and a fixed rate mortgage. It comes in jumbo loan and conforming loan amounts, VA and FHA options, as well as conventional mortgage options. These kinds of mortgages are most commonly paid off or amortized over the term of 30 years.

The first number, which is 5, in the term hybrid ARM indicates how many years the first mortgage rate is fixed, while the second number, which is 1, represents how frequently your mortgage might adjust once your fixed period lapses. A 5/1 hybrid ARM comes with a fixed mortgage rate for five years, and it would begin to adjust every year.

When you take out a 5/1 ARM, your interest rate would be approximately 1% lower than a similar mortgage with a loan term of 30 years, explains Primary Residential Mortgage, Inc., a mortgage broker in Phoenix.

They add that it offers you more protection against inflation than what you would get from a fixed rate home loan, so lenders commonly charge a reduced rate. This would be a great fit for borrowers who aren’t planning on keeping their home loans for a long time.

However, take note that you risk being stuck with your home loan once your mortgage adjusts, so you have to prepare yourself for higher payments in the future just in case. That being said, it’s essential that you know precisely how high your interest rate might adjust in the next five years.

So Should You Go for a 5/1 Hybrid ARM?

A 5/1 hybrid adjustable rate mortgage is a viable loan option if you don’t plan on keeping your house or home loan for an extended period. It provides you with a reduced rate that’s fixed for most or all the time that you plan on living in your home. With this in mind, make certain to shop around for a lender that could offer you a fair rate and the best terms.