We are an independent, advertising-supported comparison service. Our goal is to help you make smarter financial decisions by providing you with interactive tools and financial calculators, publishing original and objective content, by enabling you to conduct research and compare information for free – so that you can make financial decisions with confidence.
Bankrate has partnerships with issuers including, but not limited to, American Express, Bank of America, Capital One, Chase, Citi and Discover.
Adjustable-rate mortgages (ARMs) allow homebuyers to secure lower interest rates for an initial period before the rates start fluctuating. A 5/1 ARM is a popular adjustable-rate mortgage that offers a fixed interest rate for the first 5 years and then adjusts annually after that. This article will explain what a 5/1 ARM is how it works its pros and cons, and whether it may be the right choice for you.
What Is a 5/1 ARM?
A 5/1 adjustable-rate mortgage, commonly referred to as a 5/1 ARM is a 30-year mortgage loan with an interest rate that is fixed for the first 5 years. After the initial 5 year fixed-rate period, the interest rate will adjust once every year based on changes in a benchmark index like the Secured Overnight Financing Rate (SOFR).
The “5” refers to the number of years the interest rate remains fixed at the beginning of the loan. The “1” refers to the frequency of interest rate adjustments after the initial fixed-rate period – annually.
So in a 5/1 ARM:
- The interest rate is fixed for the first 5 years
- It adjusts every year after the first 5 years
- It is a 30-year mortgage loan
This differs from other common ARMs like 3/1, 7/1 and 10/1. The first number represents the fixed rate period while the second number represents how often rates adjust after that.
How Does a 5/1 ARM Loan Work?
When you first get a 5/1 ARM, you’ll enjoy an initial fixed interest rate for 5 years just like a fixed-rate mortgage. This allows you to lock in a low rate even if market rates rise during that time.
However, once the 5-year period ends, the interest rate can adjust up or down each year based on changes in the index the ARM is tied to. Typically lenders will use the SOFR or 11th District Cost of Funds Index (COFI) as benchmarks.
Here are some key terms to understand about how 5/1 ARM rate adjustments work:
-
Adjustment Cap: The maximum amount the interest rate can change each year after the fixed-rate period. Often capped at 2% per year.
-
Lifetime Cap: The maximum the interest rate can rise over the life of the loan. Usually around 5% above the initial fixed rate.
-
Margin: A set percentage added to the index to determine your new rate at each adjustment.
For example, let’s say you got a 5/1 ARM at 4% fixed interest for 5 years. The lender uses SOFR as the index and adds a 3% margin.
- In year 6, if SOFR rises to 5%, your new rate would be 8% (5% SOFR + 3% margin).
- The rate cannot adjust by more than 2% per year due to the adjustment cap.
- Over the life of the loan the rate cannot exceed 9% due to the lifetime cap.
Your mortgage payment will rise or fall with each adjustment based on the new interest rate.
Pros and Cons of a 5/1 ARM Loan
| Pros | Cons |
|---|---|
| Lower interest rate and payment for the first 5 years compared to a fixed mortgage | Your payment and interest rate can rise substantially after the fixed period |
| Opportunity to refinance to a lower fixed rate during initial period | Uncertainty and difficulty budgeting after fixed period |
| Your payment may go down if rates fall | Higher long-term costs if you keep the mortgage beyond 5 years |
| Can qualify for a larger loan than with a fixed mortgage | Prepayment penalties if you sell or refinance within the fixed period |
When to Consider a 5/1 ARM
A 5/1 ARM mortgage could be a good option in certain situations:
-
You plan to sell or refinance within 5 years – The lower initial rate saves money if you won’t have the mortgage long-term
-
You expect your income to rise substantially – Higher future earnings could offset payment increases from rate hikes
-
Interest rates are expected to fall in the near future – Your rate could decrease after the fixed period if rates decline
-
You can afford maximum potential payments – Higher income means rate hikes won’t stretch your budget as much
However, a 5/1 ARM involves risk. Your budget may not tolerate sharp payment increases. It’s best to consider your individual financial situation carefully.
Alternatives to a 5/1 ARM
Here are some other mortgage options to consider besides a 5/1 ARM:
-
30-Year Fixed-Rate – Lock in one rate for the entire loan. More predictable payments.
-
15-Year Fixed-Rate – Get a lower rate with slightly higher payments on a shorter-term loan.
-
10/1 or 7/1 ARM – Lock your rate for a longer 7 or 10 year fixed period before it starts adjusting annually.
-
FHA, VA, and USDA Loans – Government-backed mortgage programs can offer more competitive rates and lower down payments for qualifying borrowers.
-
ARM With Longer Fixed Periods – ARMs with longer initial fixed-rate terms of 7 or 10 years can also be worth looking into.
Is a 5/1 ARM Right for You?
While 5/1 ARMs offer tempting low rates upfront, make sure you fully assess the risks before choosing one. Consider your budget, plans to move, and financial situation. Compare potential ARM payments after the fixed period to a fixed-rate mortgage.
Work with a mortgage professional to run the numbers and decide if a 5/1 ARM aligns with your home financing goals and risk tolerance. Be prepared for the possibility of higher payments in the future.
Example of a 5/1 ARM loan Let’s say you take out a 5/1 ARM loan for $300,000 with a 5 percent interest rate. For the first five years of the 30-year loan, your rate would be locked in at 5 percent, making your monthly payment about $2,045 during that time. With a 5 percent lifetime cap on your loan, your potential maximum monthly payment would be roughly $3,140.
You can use our adjustable-rate mortgage calculator to estimate your monthly payments and see how they might change over the loan’s term.
How We Make Money
The offers that appear on this site are from companies that compensate us. This compensation may impact how and where products appear on this site, including, for example, the order in which they may appear within the listing categories, except where prohibited by law for our mortgage, home equity and other home lending products. But this compensation does not influence the information we publish, or the reviews that you see on this site. We do not include the universe of companies or financial offers that may be available to you.
At Bankrate we strive to help you make smarter financial decisions. While we adhere to strict , this post may contain references to products from our partners. Heres an explanation for . Bankrate logo
Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. We’ve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next.
Bankrate follows a strict editorial policy, so you can trust that we’re putting your interests first. All of our content is authored by highly qualified professionals and edited by subject matter experts, who ensure everything we publish is objective, accurate and trustworthy.
Our mortgage reporters and editors focus on the points consumers care about most — the latest rates, the best lenders, navigating the homebuying process, refinancing your mortgage and more — so you can feel confident when you make decisions as a homebuyer and a homeowner. Bankrate logo
Bankrate follows a strict editorial policy, so you can trust that we’re putting your interests first. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions.
We value your trust. Our mission is to provide readers with accurate and unbiased information, and we have editorial standards in place to ensure that happens. Our editors and reporters thoroughly fact-check editorial content to ensure the information you’re reading is accurate. We maintain a firewall between our advertisers and our editorial team. Our editorial team does not receive direct compensation from our advertisers.
Bankrate’s editorial team writes on behalf of YOU – the reader. Our goal is to give you the best advice to help you make smart personal finance decisions. We follow strict guidelines to ensure that our editorial content is not influenced by advertisers. Our editorial team receives no direct compensation from advertisers, and our content is thoroughly fact-checked to ensure accuracy. So, whether you’re reading an article or a review, you can trust that you’re getting credible and dependable information. Bankrate logo
Is a 5/1 Adjustable-Rate Mortgage (ARM) a Good Idea?
What is a 5/1 ARM loan?
A 5/1 ARM is a type of adjustable rate mortgage loan (ARM) with a fixed interest rate for the first 5 years. Afterward, the 5/1 ARM switches to an adjustable interest rate for the remainder of its term. The words “variable” and “adjustable” are often used interchangeably.
What is a 5/1 adjustable rate mortgage (ARM)?
A 5/1 adjustable rate mortgage (ARM) is a mortgage loan with an initially low-interest rate lasting five years. Once the five years expire, the interest rate changes based on the interest rates on various lending market indexes.
What is a 5/1 arm?
A 5/1 ARM is one type of adjustable-rate mortgage. The “5/1” refers to the length of the fixed-rate period and the frequency of rate changes, respectively. The “5” is the fixed-rate period of the mortgage — the first five years. The “1” is how often the interest rate adjusts after that — once per year.
Should I get a 5/1 arm mortgage?
Most homeowners prefer the stability of a 30-year fixed-rate mortgage payment for the life of their loan. However, if current 30-year mortgage rates are too high, a 5/1 ARM rate can make sense — especially if you’re planning to relocate within five years.
Does a 5/1 arm have a fixed interest rate?
A 5/1 ARM has a fixed interest rate during the first five years. That’s what the “5” indicates Afterward, the interest rate changes each year. That’s what the “1” indicates Check your ARM loan eligibility. Start here Keep in mind that a 5/1 ARM (and most other ARM loans) still have a total loan term of 30 years.
What is the difference between a 5/1 and 3/1 arm?
The 5/1 ARM will offer a fixed interest rate for the first five years of the loan term, while the 3/1 has a fixed rate for only the first three years. Once these teaser rates expire, the ARM will reset and be subject to interest rate adjustments for the remaining 25 or 27 years of the 30-year mortgage.