Current 5/1 ARM rates

What is a 5/1 ARM loan?

As the name suggests, the interest rate on an adjustable-rate mortgage, or ARM, changes over time. For a five-year ARM, the introductory rate stays the same for five years. The rate can change once a year after the initial fixed period, and the new rate will be pegged to market conditions at the time of the adjustment. Essentially: If rates on new mortgages are lower than your current rate when your adjustment hits, your ARM rate and monthly payment will go down. If rates are higher, your rate and costs will go up.

How does a 5/1 ARM work?

The amortization schedule is the same as for a 30-year mortgage. The interest rate will remain steady for the first five years, and then adjust annually after that. The variable interest rate after the fifth year is determined by a market index. With mortgage rates rising from their pandemic lows, existing ARM holders are likely to see their payments go up if they’re in their adjustment period.

>>Read more about how an ARM loan works.

Pros and cons of a 5/1 ARM

As with most financial products, 5/1 ARMs have their benefits and drawbacks. Here are the key things to know:

Pros:

• It has lower rates and payments early in the loan term
• Borrowers may be able to qualify for a larger mortgage thanks to lower initial payments
• Borrowers may be able to invest their monthly savings
• It offers a cheaper way for borrowers who don’t plan on living in one place for very long to buy a house

Cons:

• Rates and payments can rise significantly over the life of the loan
• Some annual caps don’t apply to the initial loan adjustment, making it difficult to swallow that first reset
• These loans are more complex, so borrowers need to be more active and savvy in managing their accounts

5/1 ARM loan FAQs

• When should you consider a 5/1 ARM?

  ARMs are a good option when rates are high. ARMs first became available to American homeowners in 1981, a year when the average rate on a 30-year loan surged past 18 percent. As mortgage rates rode a rollercoaster through the 1980s, homeowners often flocked to ARMs. Rates spiked in 1984 and again in 1987, and ARMs made up more than two-thirds of all mortgages during those periods of rising rates. With fixed rates much lower more recently, ARMs probably aren’t the wisest choice for most borrowers. That’s reflected by the small number of borrowers taking ARMs — they account for less than 3 percent of mortgage applications.

  ARMs usually only make sense if the rate and other fees combined equal a lower APR than a fixed mortgage for the term.

  >>Read more about choosing between a an ARM and a fixed-rate mortgage.

• How are variable rates on ARMs are determined?

  Most ARM rates are tied to the performance of one of three major indexes:

  • Weekly constant maturity yield on one-year Treasury bill – The yield debt securities issued by the U.S. Treasury are paying, as tracked by the Federal Reserve Board
  • 11th District cost of funds index (COFI) – The interest financial institutions in the western U.S. are paying on deposits they hold
  • The Secured Overnight Financing Rate (SOFR) – The SOFR has replaced the London Interbank Offered Rate (LIBOR) as the benchmark rate for ARMs

  Your loan paperwork identifies which index a particular ARM follows.

  To set ARM rates, mortgage lenders take an index rate and add an agreed-upon number of percentage points, called the margin. The index rate can change, but the margin does not.

  For example, if the index is 1.25 percent and the margin is 3 percentage points, they are added together for an interest rate of 4.25 percent. If, a year later, the index is 1.5 percent, then the interest rate on your loan will rise to 4.5 percent.

• What are the requirements for ARM refinance loans?

  Lender requirements vary, but in general, you’ll get a better deal if you have a higher credit score and strong overall finances.

• Is there a rate cap on 5/1 ARMs?

  A rate cap puts a limit on how much your interest rate can go up. There are two types of caps:

  • Period adjustment cap: How much your rate can go up or down within an adjustment period
  • Lifetime cap: Limits rate increase throughout the lifetime of the loan (by law ARMs must have a lifetime cap)

  Keep in mind that a drop in interest rates doesn’t mean your monthly payments will go down (or up) right away. Some lenders may hold on to some or all of the rate decline and move it over to the next adjustment period — referred to as a carryover.

  For example, if your rate cap is 1 percentage point and interest rates went up by 2 percent, your lender can hold onto the “extra” 1 percent and increase your monthly payment in the future even if the index rate hasn’t gone up.

• Alternative types of ARM loans

  The most common types of ARMs are also known as hybrid ARMs. These have initial fixed-rate periods followed by a floating rate for the remainder of the loan. Hybrid ARMs include:

  • 3/1 ARM: The first three years have a fixed rate followed by a floating rate for the remainder of the loan.
  • 5/1 ARM: The first five years have a fixed rate followed by a floating rate for the remainder of the loan.
  • 7/1 ARM: The first seven years have a fixed rate followed by a floating rate for the remainder of the loan.
  • 10/1 ARM: The first 10 years have a fixed rate followed by a floating rate for the remainder of the loan.

  Usually, 5/1 ARMs have the lowest interest rate of the bunch. For those who think they’ll refinance or sell within five years, this could be a cost-effective mortgage option.

  Of course, it’s also a gamble. If your income or credit situation changes for the worse, you might not be able to refinance. If you can refinance, you might end up with a higher rate than if you would have gotten a fixed-rate loan in the first place.

• What is the LIBOR vs. SOFR index?

  The London Interbank Offered Rate (LIBOR) is a benchmark rate that helped inform interest rates on ARMs, among other financial products. Due to limitations that made it unreliable, LIBOR is phasing out and being replaced by the Secured Overnight Financing Rate (SOFR). The difference: With LIBOR ARMs, the adjustment to the rate occurs once per year. With a SOFR ARM, that change takes place every six months. Many banks ceased originating products tied to LIBOR at the end of 2021, but you might still see some LIBOR ARMs advertised on Bankrate for the time being.

Learn more about adjustable-rate mortgages

• Adjustable-rate mortgage resources
• ARM calculator
• ARM refinance rates
• Should you refinance your ARM into a fixed-rate mortgage?