Compare Mortgage Rates on a 5/1 ARM
If you’re considering buying a house but you’re not necessarily planning to stay in it forever, a 5/1 ARM (adjustable-rate mortgage) could be right for you. This kind of home loan will almost definitely help you get a lower interest rate than if you chose a fixed-rate mortgage, at least at first. That said, choosing a 5/1 ARM means taking on some risk — and more risk than comes with other kinds of adjustable-rate mortgages, too.
As a result, if you’re thinking about this kind of loan, it’s important to weigh the pros and cons and compare mortgage rates on 5/1 ARM options from different lenders.
What is a 5/1 ARM?
A 5/1 ARM is a type of mortgage with an interest rate that the lender can adjust periodically. The “5” and the “1” tell you how the adjustable-rate mortgage functions.
The “5” tells you how long the introductory fixed-rate period on the ARM lasts in years. That means that for five years, you’ll get a fixed interest rate. In other words, you’ll have predictable monthly payments for the first 60 payments (five years * 12 months in a year).
The “1” tells you what happens after that five-year period is up. It indicates that your lender can adjust your interest rate every one year (i.e., annually) after that point.
The way your rate adjusts depends on how the market has performed. Every ARM is tied to a specific market index (usually, the secured overnight financing rate [SOFR]). The interest rate you pay at each adjustment period equals that index rate plus the margin your lender adds (that will be spelled out in your loan details and the margin won’t change over the life of your loan).
That means that if your ARM’s index went up, your interest rate will, too — and so will your monthly mortgage payments. If it went down, your rate and monthly payment could drop. Generally though, indexes tend to go up, not down.
That makes it extra important to compare mortgage rates with a 5/1 ARM. And not just the introductory rate, but the highest rate you could end up paying at each adjustment period. You can figure this out based on the adjustment caps spelled out in your loan agreement.
Once you know those caps (i.e., how much the lender can increase your rate at each adjustment period, and in total over the life of loan), you can crunch the numbers. Use our ARM calculator to figure out the maximum you could end up paying if you choose a 5/1 ARM.
Pros and cons of a 5/1 ARM
Before you choose this kind of loan, it’s important to understand the potential benefits and the risks.
Pros of a 5/1 ARM
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5/1 ARMs have relatively short introductory periods (compare them against 7/1 or 10/1 ARMs, for example). Because that lets the lender start adjusting your rate sooner, it’s lower-risk for them. That can help you get a lower interest rate for your introductory period.
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If you plan to sell the house or refinance before the introductory period ends, choosing this kind of loan can help you save on interest costs.
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The lower initial rate makes your monthly payments smaller, which in turn lowers your debt-to-income (DTI) ratio. That can make it easier to qualify for the mortgage.
Cons of a 5/1 ARM
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The relatively short introductory period means that 5/1 ARMs come with a fair amount of unpredictability. If you choose a 30-year loan term, you’ll have 25 years of not knowing what your monthly mortgage payments will be.
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Because ARMs come with additional details like indexes, margins, and adjustment caps, they’re harder to understand than fixed-rate mortgages.
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Indexes have historically risen, which means you’ll likely end up facing higher monthly payments at some point in your 5/1 ARM (assuming you keep the mortgage for the full loan term).
How to compare 5/1 ARM Rates mortgage rates
If you only take one piece of advice when you’re getting a mortgage, let it be this: compare rates from at least three different lenders. Doing so can save you thousands of dollars over the life of your loan.
To make it easier for you to put the work in here, follow these steps:
Step 1: Understand your borrower profile
First, you want to get a handle on how mortgage lenders are going to see you. If you look like you’re going to be able to repay your home loan fairly easily, they’ll offer you more favorable conditions. If you look high-risk, you’re going to pay more for your mortgage. Specifically, you’ll be charged a higher interest rate.
So, what makes a borrower low- or high-risk? To decide what kind of loan to offer to you (if any), lenders look at a lot of factors. The biggest ones here include:
- Your monthly income — you don’t want an overly large chunk to have to go toward paying your monthly mortgage bill, which lenders measure with your debt-to-income (DTI) ratio
- Your credit score, which essentially tells them how good you’ve been with managing money in the past
- Your loan-to-value (LTV) ratio (higher is riskier) — the price of the house and your down payment size both come into play here
If you’re not in good shape in any of these areas, putting in some work before you buy (e.g., working on your credit score, lowering your DTI ratio) can help you get a lower interest rate.
Step 2: Use rate tables to see what’s on offer today
There are lots of resources online that show you rate offers from leading lenders. Use a mortgage rate table to get a feel for what kind of interest rates are available from financial institutions that provide home loans in your area.
Ideally, that rate table lets you input personal information, like your credit score and the price of the house you want to buy. This way, the rates you get shown should align with what you’re actually eligible to get. A lot of lenders advertise low starting rates, but only the “best” borrowers will be approved for them once they apply.
Step 3: Get preapproved with three lenders
Once you’ve picked out a few lenders that look good to you, go through their preapproval process. That will mean filling out some paperwork, but it’s the best way to figure out what you can really qualify for in terms of loan size and interest rate.
Have financial documents — like your bank statement and pay stubs — handy to make it easier to complete your preapproval applications.
Step 4: Compare preapprovals
When you get preapproved, the lender should give you documentation about your potential mortgage. Ideally, this gives you a feel for the total amount you’re borrowing, the repayment term, the interest rate, fees, and closing costs.
Line up your quotes from each lender and go through them, paying special attention to the annual percentage rate (APR). This tells you how much you’ll pay each year for the loan including not just interest, but also fees. By looking at APRs, you get a clear idea of what you’ll truly pay if you choose that specific mortgage. This helps you identify the best option for yourself and your financial goals.
If you’re ready to start comparing 5/1 ARM Rates rates, use our rate table to get started. We have fields up top where you can input key details like your credit score range and zip code so we can best tailor the mortgage rate offers to you.