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Can you pay off a 5 1 ARM early?

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.

A 5-year adjustable-rate mortgage (5/1 ARM) can be paid off early, however, there may be a pre-payment penalty. A pre-payment penalty requires additional interest owing on the mortgage. Effect January 10, 2014, the Consumer Financial Protection Bureau established rules limiting prepayment penalties. Ask your service provider if you are subject to any prepayment charges.

Some adjustable-rate mortgages contain fixed-rate conversion options.

5/1 ARM rates today





Rotating question markFrequently Asked Questions About 5/1 ARMs

Q. Can you refinance a 5-year ARM?
A. Yes. In fact that is a common strategy for 5/1 ARM borrowers. Carry the lower mortgage rate on a 5/1 ARM and refinance to a solid fixed-rate when the interest rates are favorable.

Q. How much can a 5/1 ARM increase?
A. There are interest rate caps with 5/1 ARMs. Typically, the annual interest rate cap is two percent over the 5/1 interest rate.

Q. Is it better to get a 15-year mortgage or pay extra on a 30-year mortgage?
A. Use our loan payoff calculator and run the numbers.

Q. Is a 2-year or 5-year fixed mortgage better?
A. It all depends on your situation

Q. What is a 5/1 jumbo ARM?
A. A jumbo loan is a loan that exceeds the lending limit of Fannie Mae (Federal National Mortgage Association) and the Federal Home Loan Mortgage Corporation (Freddie Mac). A jumbo 5/1 ARM is an adjustable-rate mortgage that is greater than the established lending limits.

Q. What is the difference between a 5/1 ARM and a 5/5 ARM?
A. The interest rate on a 5/1 ARM is fixed for 64 payments and is subject to annual adjustments. The 5/5 ARM like the 5/1 ARM is fixed for the first 64 payments, however, after the first 60 payments, the revised interest rate again will be fixed for the next 5 years.

Q. Why use a 5/1 ARM?
A. 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.

Q. Do you want (or need) to qualify for a larger loan?
A. 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.

Q. What are the disadvantages of the 5/1 ARM loan?
A. 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.

Q. Does FHA offer 5/1 ARM?
A. 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.