What Is A 5/1 Adjustable-Rate Mortgage (ARM)?

What is a 5/1 ARM?

A 5/1 ARM is a type of adjustable-rate mortgage, which is a loan that comes with a low initial fixed-rate period. After that initial period ends, the rate adjusts up or down periodically.

The numbers in an ARM loan name indicate how long the introductory fixed-rate period lasts and how frequently the rate changes once that intro period ends. In the case of a “5/1” ARM, the “5” means that the loan has a fixed rate for the first five years. After those five years elapse, the rate will adjust every year, which is what the “1” stands for.

How does a 5/1 ARM loan work?

In the case of all ARM loans, whether it’s a 5/1 ARM or any other type of ARM, the fixed-rate period begins immediately. That means, once you close on the loan, you’ll have a fixed interest rate starting with your first monthly payment. That rate will remain in place for 60 months.

As an example, if you closed on a 5/1 ARM loan in January 2025, the interest rate associated with the loan would not change until January 2030. Next comes the adjustment period, during which the rate will change once per year, every year, until the loan term ends. Your monthly mortgage payment amount after the initial fixed-rate period expires will vary based on the annual interest rate applied to the loan each year.

Important terms to know about 5/1 ARMs

ARMs are uniquely structured to allow for a lower introductory rate and subsequent adjustments, but your rate can’t just keep climbing indefinitely. On your closing documents, you’ll see the following:

• Introductory or “teaser” rate: This refers to the interest rate you’ll pay during the initial fixed-rate period.
• Adjustment intervals: This indicates the frequency at which the rate can change. It can also be referred to as the reset date.
• Initial adjustment cap: This cap is the maximum amount by which the rate can rise at the first adjustment, often 2 or 5 percentage points higher than the initial rate.
• Periodic rate cap: The periodic rate cap, also called the subsequent adjustment cap, is the maximum amount by which the rate can change each time it resets, typically 2 percentage points higher than the prior rate.
• Lifetime cap: This is the maximum amount by which the rate can change over the life of the loan. This varies by lenders, but is generally 5 percentage points.

Knowing the caps on how much your interest rate could increase can help you plan and budget for future payments after the initial fixed-rate period ends. Alternatively, if you think you wouldn’t be able to afford higher payments, then exploring a fixed-rate loan might be a better option.

Example of a 5/1 ARM loan

Here’s a closer look at a 5/1 ARM loan scenario: You borrow $400,000 to buy a home and use a 5/1 ARM to finance the purchase at a 6.7 percent interest rate. In this arrangement, the 6.7 percent interest rate would remain in place for five years, and during that time, your monthly loan payment would be about $2,581.

Say, after five years, your rate then adjusts up by 0.25 percent, making it 6.95 percent. Your new monthly payment for that year would be about $2,641. In another year, the rate will adjust again, and so on until the loan term ends.

You can use Bankrate’s adjustable-rate mortgage calculator to estimate your monthly payments and see how they might change over the loan’s term.

What index does the 5/1 ARM use?

The index is a major factor in determining the rate you pay on your ARM. ARMs are typically tied to the 11th District Cost of Funds Index (COFI) or the Secured Overnight Financing Rate, or SOFR. You can find out the specific index your lender uses on your loan estimate paperwork. If the yield on that index increases, your ARM rate also increases.

5/1 ARM loan requirements

The requirements for a 5/1 ARM loan depend on what type of loan you’re getting, such as a conventional, FHA or VA loan. For any type of ARM, though, you’ll need to meet requirements such as:

• Having a minimum credit score
• Meeting debt-to-income (DTI) ratio limits
• Making a minimum down payment
• Meeting ARM loan limits, if applicable

Pros and cons of a 5/1 ARM

Pros

• Cheaper monthly mortgage payments during initial fixed-rate period
• Your rate could decrease in the future
• More affordable initial payments could make you a homeowner sooner

Cons

• Potential for higher rates during adjustment period
• More complex loans to understand
• Less predictable mortgage payments during adjustment period
• Could cost more overall

Alternatives to 5/1 ARMS

• 5/1 ARM vs. other ARMs: Other ARMs, such as a 10/1 or 7/1 ARM, work similarly to 5/1 ARMs, except the length of the initial fixed-rate period and the interest rate will differ. For a 10/1 ARM, the initial rate is fixed for the first decade rather than five years, and for a 7/1 ARM, the initial rate adjusts after the first seven years. Rates likely will be slightly higher on a 10/1 and 7/1 ARM compared to a 5/1 ARM because they have longer introductory fixed-rate periods.
• 5/1 ARM vs. fixed-rate mortgage: The introductory fixed rate on a 5/1 ARM is often considerably lower than the one on a 30-year fixed-rate loan. That translates to a lower monthly payment, at least initially. Of course, the drawback is uncertainty. After five years, your ARM rate and monthly payment could rise. With a fixed-rate loan, you’ll know exactly how much you’ll pay over the life of the loan, making the payments easier to budget for.

What borrowers should know about 5/1 ARMs today

While interest rates on 30-year mortgages have been declining from the high of 8 percent that they reached in 2023, they’re still much higher than those of the pandemic era, bouncing around between 6.5 and 7 percent. A 5/1 ARM can offer a more affordable way to get into a home amid the current rate environment.

But these loans may not be right for everyone. Some situations where they can make more sense include:

• You plan to refinance or sell soon. If you don’t plan to keep the loan for more than five years, you’ll never deal with a rate adjustment. You’ll need to have a concrete plan for how you’ll get out of the loan, however, whether that’s moving or refinancing. If you want to refinance, keep in mind you’ll need to be able to qualify for it, as well as pay closing costs.
• Your finances will improve over the coming years. A 5/1 ARM is generally best for those who know their income will increase in the future, given the uncertainty of interest rate adjustments after the first five years. This might be the case if you’re a doctor just coming out of medical school, for example, or in another profession with a similar lucrative earnings horizon.
• Your budget already accommodates a higher payment. If you’re well off financially, a bump in rate and payment might not matter much in your budget. This lowers the risk of rate adjustments considerably — but it also means you might not have as much left over for other financial goals, like investing or saving for retirement.

“The differential between the initial rate on an ARM and that of a fixed rate mortgage isn’t always the same, but the risk of future rate adjustments is always there,” says Greg McBride, CFA, chief financial analyst for Bankrate. “Sometimes the difference in [the] initial rate is slight enough that you don’t get enough benefit to justify the risk. An ARM can make sense if you don’t plan to be in the home long enough to see the first rate adjustment, such as if you plan to move again within the next 5 years. But even if you go this route, beware that if your initial timetable doesn’t pan out, you could face higher payments when the rate begins to adjust.”

5/1 ARM FAQ

• What do I do if interest rates increase dramatically?
  

  When you take out a 5/1 ARM, there’s a chance your interest rate and payment could increase once the initial fixed-rate period ends. To prepare for a payment increase, you can budget accordingly or seek guidance from a housing counseling agency approved by the U.S. Department of Housing and Urban Development (HUD). You can also refinance your ARM loan to a fixed-rate mortgage if you can secure a lower rate and plan to stay in the home long enough to break even on closing costs.

• How do I get the best 5/1 ARM initial rate?
  

  Borrowers with excellent credit scores are typically offered the best mortgage rates by lenders. You can also make a higher down payment, which decreases your loan-to-value ratio (LTV) and in turn can help you get a lower mortgage rate. You might think paying for mortgage points will also help you get the best initial interest rate on a 5/1 ARM, but this isn’t necessarily the smart move.

  ”It often takes five to six years before the cost paid for points upfront is recouped through the lower monthly payments,” says McBride. “Taking a 5/1 ARM makes sense if you plan to move within the next five years, but paying points to further reduce the rate would take longer than five years to recoup. If you have the cash to pay points, this is better suited when you plan to have the loan long enough to recoup the costs, such as a 10-year ARM or a fixed-rate mortgage.”

• What is a convertible ARM?
  

  A convertible ARM is an adjustable-rate mortgage with a clause that allows you to convert your interest rate from adjustable to fixed after the initial fixed-rate period expires.