Dear Dr. Don,
My husband and I are considering refinancing our home with a 5/1 adjustable-rate mortgage. Please explain the difference between the 5/2/5 and the 5/2/6.
-- Marilyn Mortgage
Dear Marilyn,
A 5/1 adjustable-rate mortgage is a hybrid ARM because it locks in the interest rate for the first five years of the mortgage. The first interest rate reset is five years from the loan origination. After the five-year initial term, the loan resets annually -- that's the "one" part of the 5/1 ARM.
When the lender starts quoting a 5/2/5 or a 5/2/6 structure, they're talking about a first reset interest rate cap of 5 percent over the initial rate, subsequent caps of 2 percent, and a lifetime cap of 5 percent or 6 percent over the life of the mortgage. The lifetime cap is one difference between the two structures in your question.
Other differences between the two structures could include the underlying index that is used to price the mortgage, and the pricing spread used to determine the mortgage interest rate. The Bankrate feature "Understanding adjustable-rate mortgages" explains all of this in greater detail.
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