Current 5/1 ARM mortgage rates

Interest rate animationA 5 year adjustable rate mortgage (5/1 ARM) is a mortgage with a fixed interest rate for the first five years, actually, the first 60 payments, then the interest rate can adjust each year thereafter. The new interest rate can go up or down. The 5/1 arm interest rate is typically lower than the traditional 30 fixed rate.

What are 5/1 arm loans?

The 5/1 adjustable rate mortgage (ARM) is a combination of a fixed rate mortgage for the first 5 years (60 payments) and a one year adjustable rate mortgage. After the first 5 years (60 payments), the interest rate is subject to change each year for the remaining life of the loan. The interest rate adjustment is based on a predetermined formula.

Why use a 5/1 arm?

If you will be in your house for less than five years, you will save money by choosing the 5/1 ARM because the interest rate is less than a 30 year fixed rate mortgage. The 5/1 arm is a popular choice for corporate and federal gypsies.

Do you want (or need) to qualify for a larger loan? The lower initial interest rate of a 5/1 arm can help you qualify for a bigger loan, which means you can purchase a more expensive house.

Because the 5/1 arm provides a lower monthly payment for the first 5 years, the savings can be used for college savings, investments, retirement, home expenses, etc.

What are the disadvantages of the 5/1 ARM loan?

The obvious disadvantage of the 5/1 ARM loan is that after the first 5 years, the monthly payment can increase every year if the interest rate goes up. It may be hard to come up the extra money every month for a higher monthly payment if your income doesn't increase along with the rates.

The "new" interest rate is defined in the mortgage that you agree to. The adjustment is based on a formula using an index for the previous 52 weeks. However, the 5/1 arm usually "caps" the maximum interest rate increase to one or two percent over the previous year, and limits the total interest rate limit to 5 percent over the initial interest rate.

Can a 5/1 arm be refinanced?

Yes. Many home buyers use the 5/1 arm to qualify for a more expensive house and will then refinance the 5/1 arm within the 5 year period.

Does FHA offer 5/1 arm?

Yes, although, the 5/1 arm is not originated directly from the FHA, but through approved lenders. The FHA permits lenders to offer two adjustment options:

the interest rate on the FHA 5/1 ARM can increase only one percentage point annually, and five percentage points over the life of the mortgage; or
the interest rate can increase of two percentage points annually, and six points over the life of the mortgage.