5/1 ARM mortgage rates
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5/1 ARM Mortgage Rates
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What is a 5/1 ARM?
A 5/1 adjustable rate mortgage (5/1 ARM) is an adjustable-rate mortgage (ARM) with an interest rate that is initially fixed for five years then adjusts each year. The "5" refers to the number of initial years with a fixed rate, and the "1" refers to how often the rate adjusts after the initial period.
The initial fixed interest rate is typically at a low introductory level. After the initial fixed period, the new, adjustable rate, which changes annually, is tied to an interest rate index that moves based on a variety of economic and financial market factors. After the introductory period, your interest rate will reset to the indexed rate and then go up if the index rises, and drop if it falls. If you don’t refinance, you’d pay off the loan in 30 years.
When should you consider a 5/1 ARM?
A 5/1 ARM makes sense if you plan to refinance your mortgage or sell your house before the introductory rate expires or if you expect the value of your house to rise quickly. If you choose an ARM, you’ll likely be able to qualify for a larger loan because of the low introductory rate. But be careful, your interest rate and monthly payment will increase after the introductory period, which can be 3, 5, 7 or even 10 years, and can climb substantially depending on the terms of your specific loan.
Rate cap:The maximum amount your loan’s interest rate can increase for each designated period of time.
2/2/5:Tells you the limits on just how high your interest rate can go. In this example, the initial rate increase can be no more than 2 percentage points. Each subsequent adjustment can be no higher than 2 percentage points — and the last digit represents the lifetime maximum rate increase your loan will allow. In this case, a 5 percentage point maximum.
Index margin:Your loan’s rate is based on an interest rate index plus some fixed percentage. For example, an index rate of 2.25% plus a margin of 1.50 percentage points would mean your interest rate would be 3.75%.