5/1 ARM Loan: What It Is, And How It Works

Written by Elijah BishopUpdated: 22nd Mar 2022
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If you’re looking to buy a home and finance it with a mortgage, you may be seeing different rates for different products, including a 5/1 ARM. And if you’re like any first-time home buyer, you may be asking, what is a 5/1 ARM? 

This article will reveal what a 5/1 ARM is all about, how it works, and help you decide if it’s the right choice for you.

What Is a 5/1 ARM Loan? 

You often choose between a fixed-rate loanand an adjustable-rate loan when getting a mortgage. An adjustable-rate mortgage, or ARM, is a mortgage loan whose interest rate can alter over time. A 5/1 ARM is a hybrid mortgage that comprises a fixed rate for a predetermined time before moving to an adjustable rate.

Here’s what the two numbers mean:

  • The first number is the number of years your interest rate will remain fixed.
  • The second number is the frequency with which the rate will be adjusted annually once the fixed period has expired.

For example, if you had a 5/1 ARM with a 30-year term, you’d receive a fixed interest rate for the first five years. After then, your rate and payment would be adjusted once a year for the next 25 years.

>> More: Fixed-Rate vs. Adjustable-Rate Mortgage

How Do 5/1 ARM Loans Work? 

A 5/1 ARM loan begins with a fixed interest rate and eventually switches to an adjustable rate. Your mortgage rate is fixed for five years, and then it will fluctuate based on market rates every year after that. There are usually limits to how much the interest rate can rise. To guarantee that you pay off your mortgage on schedule, your payment will alter each time your interest rate changes.

5/1 Adjustable-Rate Mortgage Example 

Let’s look at a quick example of how much you’d pay each month (in principal and interest only) with a 5/1 ARM vs. a fixed-rate mortgage.

Let’s say you need a $250,000 mortgage and have to select between a 30-year fixed-rate loan with a 3.75 percent APR and a 5/1 ARM with a 2.50 percent beginning APR.

  • Your monthly payment on the fixed-rate loan would be $1,158, and you’d pay $166,804 in interest over the life of the loan.
  • For the first five years of a 5/1 ARM, your monthly payment would be around $987. If your loan follows the 2/2/5 cap structure, the most amount you’d pay each month after the first term would be approximately $1,581. Depending on the modifications, you could pay over $268,000 in interest.

What Are the Benefits of 5/1 ARMs? 

  • Lower initial interest rate: You’ll save money on your mortgage payments for the first few years of your loan if you start with a lower interest rate. Knowing this, you can invest the difference, pay down the mortgage, or make home upgrades.
  • You may pay less interest in the long run: You might be able to save money on interest if rates continue low. Furthermore, you minimize the interest you pay by applying the difference in payment amounts between a variable-rate and a fixed-rate loan to the principal.
  • If you’re moving soon, this can be useful: You might be able to save if you know you’ll be moving within five years, before the rate changes. When you know you’re not going to stay in the house, you can make the necessary adjustments to save money on your monthly mortgage and interest payments.

What Are the Disadvantages of 5/1 Adjustable-Rate Mortgages? 

  • Potentially higher mortgage payment: If interest rates rise, your monthly mortgage payment will likely climb. Following the initial time, payments may increase until the cap is reached. If this is the case, your monthly budget may suffer.
  • Could end up paying more in interest: Even with a rate cap, you may pay more in interest over time if rates continue to rise.
  • It’s possible that the rate difference isn’t worth the trouble: If the interest rate difference between a fixed-rate loan and an ARM isn’t significant, a fixed-rate loan with a somewhat larger initial payment may be the best option. Especially since refinancing your mortgage can result in higher payments if you later decide to switch to a fixed-rate loan.

How to Compare 5/1 ARM Loans: What to Look For 

When evaluating loan choices, there are a few numbers to pay attention to when looking at ARMs. For example, one might be advertised as a 5/1 ARM with 2/2/5 caps. Let’s look at what that means in detail, one number at a time.

Lifetime Cap

The final number is the lifetime limit on rate increases. The lifetime cap reveals the highest mortgage interest rate level can go regardless of market changes. For 5/1 ARM loans, the interest rate can’t go up more than 5% for as long as you have the loan.

Fixed-Rate Period

The first number specifies how long the rate stays fixed at the beginning of the term – in this case, five years.

Adjustment Intervals

The following number tells you how often the rate adjusts once the fixed-rate portion of the loan is over. For this example, the 5/1 ARM adjusts once per year.

Initial Cap

The first cap limits the amount the rate can adjust upward the first time the payment changes. In this case, regardless of market conditions, the first adjustment can’t be an increase of higher than 2%.


Some ARMs may have special fees or penalties if the mortgage is paid off early before the loan’s full term.


Some ARMs have a special provision that allows the borrower to convert the ARM to a fixed-rate mortgage at designated periods during the life of the loan.

Negative Amortization

When a loan is under negative amortization, the loan balance increases, and this usually happens when the payment cap or demand is smaller than the principal and interest payment.

>> More: See the Best Mortgage Lenders

When Does Getting a 5/1 ARM Loan Make Sense? 

If you don’t plan on staying in your home for the long haul, a 5/1 ARM makes sense. You can take advantage of the ARM’s lower initial fixed interest rate and lower first monthly payment if you plan to sell your house within five years.

5/1 ARM Loan FAQs

What Type of Loan is a 5/1 ARM? 

A 5/1 ARM is an adjustable-rate mortgage loan (ARM) with a fixed interest rate for the first five years. Afterward, the 5/1 ARM switches to an adjustable interest rate for the remainder of its term.

What Are the Differences Between a 5/10 and a 10/1 ARM? 

A hybrid adjustable-rate mortgage, or 5/1 ARM, is an adjustable-rate mortgage with both fixed and variable rates. Your initial or introductory interest rate remains fixed for five years with a 5/1 ARM. After that, the rate will be adjusted once a year following current market conditions.

A 10/1 ARM, on the other hand, is a hybrid adjustable-rate mortgage with a fixed rate. Your starting interest rate on a 10/1 ARM will remain the same for ten years. Your lender might alter the rate yearly based on market conditions.

What Is a 5/1 ARM Interest-Only Loan? 

An interest-only loan is a non-conforming mortgage that only charges interest for a specific time. If you choose a 5/1 interest-only ARM, you’ll only have to pay interest for the first five years. Your mortgage would begin to amortize, which means you’d start paying principal and interest as part of your monthly mortgage payment. These are the types of loans that we do not provide.

Are 5/1 ARMs Considered a Hybrid Mortgage? 

The 5 Year Arm is a hybrid mortgage, often known as a 5/1 ARM. This implies the loan combines the benefits of a fixed-rate mortgage (for the first five years) and an adjustable-rate mortgage (for the remaining five years) (for the remaining years).

Bottom Line: 5/1 ARM Loans 

You can choose from various home loan products as a mortgage borrower. A 5/1 ARM may not be the best option for you if you plan to stay in your home for a long time and want the security of a fixed rate for the life of your mortgage repayment period. 

If you’re considering a 5/1 ARM, shop around for various lenders. Comparing your options with multiple mortgage lenders is an excellent way to end up with a great bargain. One lender may offer you a lower 5/1 ARM rate than another, so comparing your options with numerous online mortgage lenders is an excellent way to end up with a fantastic deal.

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Elijah Bishop
Elijah Bishop

Elijah A. Bishop is a Senior Personal Finance Writer who has been writing about real estate and mortgages for years. He has a Bachelors of Arts Degree in Creative writing from Georgia State University and has also attended the Climer School of Real Estate. He also holds a realtor license and has been in and out of the US mortgage industry as a loan officer. Bringing over 15 years of experience, Elijah produces content that analyzes ethnicities, race, and financial well-being. His areas of expertise are mortgages, real estate, and personal loans.