Although a fixed-rate mortgage is often the go-to mortgage for many borrowers, a certain kind of adjustable-rate mortgage (ARM)—namely a 5/1 ARM—may be a better option.
What is a 5/1 ARM? A 5/1 ARM is a mortgage that has a fixed interest rate for a number of years and then morphs into an adjustable-rate mortgage, with the rate changing at certain intervals based on the current rates and a preset formula. As the name implies, a 5/1 ARM is a mortgage that has a fixed rate for five years before changing to an ARM that can adjust once per year.
What are the benefits of a 5/1 ARM? The biggest benefit of a 5/1 ARM is that it offers a lower interest rate for the first five years. Also, a 5/1 ARM can give you the security of knowing what your monthly payments will be for the first five years, as opposed to the difficult to predict changes associated with a standard ARM.
What are the drawbacks of a 5/1 ARM? After the initial five-year period has ended, you may have a mortgage with a higher interest rate—and that rate may continue to adjust upwards each year, although there is a cap on how much your rate can go up. Also, be aware that some states have prepayment penalties if you sell or refinance the loan within the first five years.
When would a 5/1 ARM make sense? If you plan to move during the first five years of your 5/1 ARM, taking advantage of the lower initial rate may be a good choice. Also, if your credit isn’t quite where you want it to be, having a 5/1 ARM may be beneficial in that you can work to improve your credit while enjoying the lower rate.
Although a 5/1 ARM isn’t the right solution for every borrower, it can be a good option. As always, consult with your mortgage professional to see which type of mortgage is right for you.
For more than 25 years, Omega Financial has been serving mortgage clients in Massachusetts. Our brokers have approximately 50 years in the mortgage business. You always will receive fast, courteous, and accurate information. Omega Financial, Inc. is a company duly licensed to operate in Massachusetts as a Mortgage Brokerage. We are located in the Town of Norwood, Massachusetts where we have been operating as Omega Financial Incorporated since 1988.
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