5/1 ARM: Your Guide to 5-Year Adjustable-Rate Mortgages

5/1 ARM: Your Guide to 5-Year Adjustable-Rate Mortgages
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One way to save on interest, at least at the beginning of a mortgage, is to take out a 5/1 adjustable (5/1 ARM) mortgage. With 5/1 ARM, you have a fixed rate for the first five years of your mortgage, with the rate adjusted each year thereafter.

1/5 ARM can help you get a lower interest rate initially, which makes it attractive to some homebuyers.

Here’s what you need to know about 5/1 ARM loans:

What is a 5/1 ARM loan?

When you take out a mortgage, you often choose between a fixed rate loan and an adjustable rate loan. An adjustable mortgage, or ARM, is a home loan in which the interest rate can change over time.

5/1 ARM is a type of hybrid mortgage that includes a fixed rate for a specified period of time before converting to an adjustable rate.

Here’s what the two numbers indicate:

  1. the first number: The number of years the interest rate remains fixed.
  2. The second number: How often will the rate be adjusted annually after that fixed period.

For example, if you have 1/5 ARM for 30 years, you will have a fixed interest rate for the first five years. Then, you’ll notice the price and payment change once per year for the remaining twenty-five years.

Good to know: 5/1 ARM is one of the most popular types of adjustable mortgage loans, and most lenders offer at least one type of ARM loan.

Learn more: What is a mortgage rate and how does it work?

How does the 5/1 . arm work?

The 1/5 ARM loan works by starting with a fixed interest rate and moving to an adjustable interest rate later. Your price is set for five years, and then every year after that, the price moves higher or lower, depending on market rates.

There are usually limits to how high the interest rate can be adjusted. Each time your rates are adjusted, your payments will also be adjusted, to ensure that you pay off your mortgage on time.

Here’s a closer look at how 5/1 ARM works:

change prices

The adjustable interest rate depends on a specific index and margin. Each year, your lender will look at the specific index on your paper and add the required margin to it – this will be the new rate for the coming year.

Here is a quick breakdown of what the indicator and margin are and how they work:

  • index: Standard interest rate based on current market conditions. In the past, many mortgages used the London Interbank Offered Rate (LIBOR), but it is being phased out in favor of the Secured Overnight Funding Rate (SOFR). Other indicators that can be considered include the cost of funds index (COFI) and fixed-maturity treasury bonds (CMT).
  • margin: This is the fixed amount added to the index by the lender, giving you your interest rate for the year. For example, if you have a 3% margin and your rate is adjusted based on SOFR – and your SOFR is at 0.15% – your new mortgage rate will be 3.15%.

advice: Ask your lender to see what index they use, along with the margin they add to the index.

Interest rate limits

The good news is that your mortgage interest adjustment is limited. Therefore, you will not see your rate rise out of nowhere.

In many cases, the lender will issue a cap based on the first and subsequent amendments and a lifetime cap. The maximum joint is 2/2/5 cap. Here’s how this cover structure works:

  • Initial adjustment cover: The first number represents the initial adjustment cap. This is the first time the lender changes the rate after the fixed rate expires. So, in this case, the rate cannot be two percentage points higher than your starting rate, no matter how much interest rates increase.
  • Post adjustment cover: The second number reflects the maximum of the following adjustments. Again, in this case, the adjustment can’t be more than 2 percentage points.
  • lifetime cover: The final figure shows the maximum lifetime. As long as you take out the loan, the interest rate can’t be more than five percentage points off the initial rate if you have a 2/2/5 ceiling.

Learn More: 3/1 ARM: Your Guide to 3-Year Adjustable Mortgages

loan terms

1/5 ARMs usually come with a total term of 15 years or 30 years. The interest rate remains fixed for the first five years and then adjusts each year thereafter for the remainder of the loan.

To find out how much your monthly payment will be at a certain interest rate, use the calculator below.

Enter your loan information To calculate how much you can pay

Total amount

Total benefits

monthly payment


Home loan, you will pay it

per month and a total of

In interest over the life of your loan. You will pay a total of

over the life of the mortgage.

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Checking rates will not affect your credit score.

To get a better idea of ​​what you’ll pay each month (in terms of principal and interest only) with a 1/5 ARM fixed rate mortgage, let’s show a quick example.

Example: Let’s say you’re looking to take out a $250,000 mortgage, and you have to choose between a 30-year fixed rate loan at 3.75% APR and 5/1 ARM with an initial interest rate of 2.50%.

  • with the Fixed rate loan, your monthly payment will be $1,158, and you end up paying $166,804 in interest over the life of the loan.
  • with the 1/5 arm, your monthly payment for the first five years will be approximately $987. Assuming your loan follows the 2/2/5 cap structure, the highest amount you end up paying each month after the initial period will come out to about $1,581. Depending on the adjustments, you could end up paying more than $268,000 in interest.

Pros and cons of the 5/1 . arm

The low initial interest rate of an adjustable rate mortgage makes it an attractive option, and can make buying a home affordable.

But you have to be comfortable with uncertainty. If interest rates rise, you may burden yourself with higher mortgage payments and have to pay more interest in the long run.


  • Lower initial interest rate: With a low interest rate starting, you’ll enjoy paying less mortgage for the first few years of the loan. Knowing this, you can use the difference to invest, pay capital, or make home improvements.
  • You may end up paying lower interest: As long as prices stay low, you may be able to save on interest. Further, if you take the difference in the repayment amount against a fixed-rate loan and apply it to the principal, you reduce the balance on which you pay interest.
  • It can be helpful if you know you’ll be moving soon: If you know you’ll move in five years, before the rate is adjusted, you can save. When you know you’re not staying at home, you can make the appropriate adjustments and save your monthly cash flow and benefits.


  • High Mortgage Payments: If rates go up, your mortgage payment will go up. After the initial period, you could see increased payments, up to a maximum. If so, it could cause problems for your monthly budget.
  • You can pay more interest during the term of the loan: If rates are trending higher, over time you may end up paying more interest overall – even with a cap on the interest rate.
  • The price difference may not be worth it: If there is not much difference in the interest rate of a fixed rate loan and ARM, then a slightly higher initial payment with a fixed rate loan may be the best option. Especially since refinancing your mortgage can add more costs if you decide to switch to a fixed rate loan in the future.

Credibility can be a huge help when trying to find a great interest rate. You can easily compare our partner lenders and see pre-qualified rates in less than three minutes – all without leaving our platform.

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  • Simplified immediate pre-approval: It only takes 3 minutes to find out if you qualify for a simplified and instant pre-approval letter, without affecting your credit.
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When you look at 5/1 ARM

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

If you’re going to stay home for five years or more, ARM is more dangerous. Since the rate can fluctuate, you may end up with a higher interest rate and minimum monthly payment.

If you decide to refinance before the end of the fixed term, be aware that you may have to pay refinancing costs that could void the savings from lower interest and payments.

About the author

Miranda Marquette

Miranda Marquette

Miranda Marquette is a mortgage, investment and business authority. Her work has appeared on NPR, Marketwatch, FOX Business, The Hill, US News & World Report, Forbes, and more.

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