What Is A 5/1 ARM?
Is It Right For You?

A 5/1 ARM is a type of adjustable-rate mortgage loan (ARM) with a fixed interest rate for the first 5 years. Afterward, the 5/1 ARM switches to an adjustable interest rate for the remainder of its term. Often called the teaser rate because it’s lower than a fixed-rate mortgage.  Once the fixed-rate portion of the term is over, the ARM adjusts up or down based on current market rates, subject to caps governing how much the rate can go up in any particular adjustment--typically once per year.  Each time your interest rate changes, your payment is recalculated so that your loan is paid off by the end of your term. Usually a 30 year term, but it doesn't have to be.

 

When the rate adjusts, the new rate is calculated by adding an index number to a margin specified in your mortgage documentation. Common indexes used to figure out rates for ARMs include the Secured Overnight Financing Rate (SOFR), the Cost of Funds Index (COFI) and the Constant Maturity Treasuries (CMT).

 

Understanding Adjustable-Rate Mortgages

What Do All the Numbers Mean?

5/1 ARM

First Number Represents Number of Years Before the Rate Adjusts

Second Number, Represents How Often It Will Adjust

In This Case 1 Time Per Year

WITH

2/2/5 caps

INITIAL CAP

In this case, regardless of market conditions, the first adjustment can’t be increased more than 2%.

2

SUBSEQUENT CAPS

In our example above, with each adjustment after the first one, the rate can’t go up more than 2%

2

5

LIFETIME CAP

Regardless of market conditions, this mortgage interest rate can’t go up more than 5% for as long as you have the loan.