What is it? The 5/1 ARM is an adjustable-rate mortgage that has a fixed rate for five years. After that time period, the rate adjusts periodically. The term for these loans is typically 30 years. Like the 1-year ARM, borrowing costs are tied to a mortgage index such as Libor, or London Interbank Offered Rate, and COFI, or 11th District Cost of Funds. Buyers benefit from lower borrowing costs when interest rates fall, but feel the pain of higher payments when rates rise.
Who is it good for? Buyers who intend to sell within five years and are looking to cut down on their mortgage costs. Also, borrowers with enough cushion in their income to cover higher payments should rates increase.
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