5/1 ARM Mortgage Rates

5/1 Adjustable-Rate Mortgage Rates

A 5/1 adjustable-rate mortgage (ARM) is a hybrid mortgage, just like 3/1 and 7/1 ARMs. A hybrid mortgage combines some of the features of fixed-rate and adjustable-rate mortgages. One of the advantages to this kind of mortgage is that the initial interest rate is generally lower with a 5/1 ARM than a standard fixed-rate mortgage. However, those lower rates are only fixed for the first five years of the loan term.

A financial advisor can help you create a financial plan to reach your mortgage goals and needs. Financial advisors can also help with investing and financial plans, including tax, retirement and estate planning, to make sure you are preparing for the future.

Historical 5/1 ARM Rates

5/1 ARM mortgage rates have fallen since the mid-2000s. In 2006, the average annual 5/1 ARM rate was 6.08%. Four years later, in 2010, the annual 5/1 ARM rate was 3.82%, on average. Annual mortgage rates for 5/1 ARMs rested above 3% from 2017 to 2020, though rates in 2021 took a tumble to 2.61%. In 2022, 5/1 mortgage arm rates jumped up to an average of 4.09%.

*These annual average mortgage rates are from Freddie Mac.

After the 60-month period of fixed interest rates, homeowners with 5/1 ARMs end up with fully indexed interest rates. These rates are based on a mortgage index like the Monthly Treasury Average (MTA) or the 11th District Cost of Funds Index (COFI).

Mortgage rates for 5/1 ARMs also depend on a margin, which determines how much a homebuyer’s interest rate differs from the index rate. While the index rate varies, the margin is typically set at the beginning of the loan term and remains the same over the life of the loan.

How 5/1 ARM Rates Stack Up Against Other Mortgage Rates

Many buyers opt for an ARM mortgage if they plan to sell the home within a few years. It’s typically a way to have a lower mortgage rate and lower monthly mortgage payments early in a loan's life. The initial rate for a 5/1 ARM is generally lower than the rates for 15-year or 30-year fixed-rate mortgages, which are aimed more for buyers hoping to stay in a home for a long time. With a 5/1 ARM, you’ll lock in a lower interest rate for the first five years. After that, the interest rate changes. It can go up or down, but it often goes up. If you’re planning on selling within that five-year time frame, a 5/1 ARM could be your best financial choice.

Let’s look at an example. A family of five is comparing mortgages for a house that costs $275,000. With a 20% down payment of $55,000, a 30-year fixed-rate mortgage of 5.34%, which was the average rate for this type of mortgage in 2022, would cost $1,227 a month. That number is just the mortgage principal and interest, not insurance or taxes, which you’ll also have to factor in. If the family plans to move in a few years, they might compare an ARM mortgage to see what difference it could make for monthly payments. A 5/1 ARM at the 2022 average rate of 4.09% for the same home price and down payment totals to about $1,062 per month for principal and interest. That equals a difference of $165 per month, which may not seem that dramatic, but per year that means a savings of $1,980. Over a five-year period that ends up equaling $9,900. Keep in mind that it’s important to weigh the likelihood of staying in the home past the initial five-year period. If you think it’s likely you’ll do so, a 5/1 ARM may become less worth it.

After the first five years of the loan term, rates become fully indexed interest rates that adjust annually. In many cases, interest rates increase and the new rate can be as much as 5% or 6% higher than the initial rate. Hybrid adjustable-rate mortgages like 5/1 ARMs tend to come with 30-year loan terms, but homeowners have the option of refinancing or selling their homes before the fixed-rate introductory period ends.

5/1 ARM Rate Caps

While 5/1 ARMs have interest rates that can fluctuate from one year to the next, they often have interest rate caps that prevent rates from spiraling out of control. Even if your interest rate increases, it will never surpass a certain threshold if there’s a rate cap. That’s a good thing, since having a higher interest rate means that you’ll be sending your lender more money every month. It’s a good idea to make sure that the highest rate mentioned in your contract fits into your budget, so you don’t have trouble paying it if the rate goes that high.

There could be as many as three different caps associated with your 5/1 ARM. Your initial interest rate cap could limit the degree to which the interest rate rises when the fixed-rate period expires. A periodic interest rate cap could limit how high the interest rate climbs once every year. Finally, a lifetime rate cap could place a restriction on how high an interest rate can rise over the entire loan term.

5/1 ARM Rate Quotes

If you’re interested in getting a 5/1 ARM, it’s best to shop around for rates before committing to any particular lender. Many websites offer free mortgage rate quotes, or estimates of the mortgage rates that you’re eligible for. Once you provide details such as your credit score, the home purchase price that you’re aiming for, the down payment you can afford to make and the area where you want the home to be located, you’ll receive a list of mortgage rate quotes.

As you’re comparing quotes, it’s a good idea to focus on more than just the estimated total mortgage payment. You’ll also need to compare APRs, which take both the interest rate and fees into account to give you the yearly cost of taking on a loan, and the total estimated cost of fees like closing costs.

In addition to looking at the information included in your mortgage rate quotes, it’s best to find out as much as you can about interest rate caps. That way, you’ll have a better idea of how high the interest rate on a particular 5/1 ARM can go. If the maximum interest rate is too high, you could have trouble keeping up with your mortgage payments down the road.

How to Get the Lowest 5/1 ARM Rates

By choosing a 5/1 ARM, you’ll likely have a lower introductory mortgage rate and a lower monthly mortgage payment than the homeowners taking on standard fixed-rate mortgages. But if you want the best interest rate, you’ll need to show your lender that you aren’t a risky borrower. That means you’ll need to have a low debt-to-income ratio. This is the amount of debt you’re paying off relative to your monthly gross income. You’ll also need a high credit score, a stable source of income and enough cash savings to cover at least two mortgage payments.

Each lender will have its own set of criteria that you’ll have to meet. Even if the interest rate it offers you is higher than you’d like it to be, you can try to reduce it by paying for discount points. One mortgage point can lower your mortgage rate by anywhere from 0.125% to 0.25%, depending on the lender.

Besides buying points, you could also reduce the cost of taking on a 5/1 ARM by putting down more money or finding out if your seller is willing to pay for some of your closing costs. For conventional mortgage loans, many homebuyers are expected to make at least a 20% down payment. As an alternative, you could find out whether you can get a 5/1 ARM through the Federal Housing Administration (FHA), since you might be able to get a home while making a low down payment of as little as 3% in exchange for paying private mortgage insurance (PMI).

Taxes and 5/1 ARMs

Many homeowners who pay mortgage interest qualify for a mortgage interest deduction. If you’re willing to itemize your deductions instead of taking the standard deduction, you could write-off the interest that you paid on a mortgage loan amount of $750,000 or less.

Just remember that if you aren’t spending a lot of money on mortgage interest, you won’t be able to deduct much money when tax time rolls around. Fortunately, there are other tax breaks that you might be able to qualify for.

Refinancing Your 5/1 ARM

Refinancing your 5/1 hybrid ARM before the end of the 60-month fixed-rate term might be a good idea, especially if mortgage rates are low at the time and you’re afraid that they could go up in the future. But keep in mind that refinancing comes at a cost. In addition to having to apply for a refinance loan and complete a lot of paperwork, you’ll have to pay for closing costs again. Even if those costs are rolled into your refinanced mortgage, you still end up paying it. If your credit score’s not in good shape or you can’t afford to pay for the fees that go along with refinancing, you might need to look into other options.

Anyone with a traditional fixed-rate mortgage with a 15-year or 30-year term can consider refinancing into a 5/1 adjustable-rate mortgage program. This could be a good idea for anyone who isn’t planning to stay in their home for a long time before moving or retiring. It could also be appealing to someone with a jumbo loan who wants to keep their mortgage payments low. It’s important to keep in mind that when you get an adjustable-rate mortgage, you run the risk of having a higher interest rate in the future. You’ll want to make sure you will be able to afford it now as well as later.