Adjustable-rate mortgages, or ARMS, are a trade-off. You sacrifice the stability of fixed monthly payments for the life of the loan in exchange for low introductory payments for a limited time. Known as a "hybrid" loan, a 5/1 ARM involves a fixed interest rate for the first five years and a variable rate that changes every year thereafter.
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Benefits of 5/1 Hybrids
The five-year fixed-rate period of a 5/1 ARM can provide enough time for your property to appreciate in value, allowing you to sell or refinance before your payments change. The 5/1 ARM is the most popular of the hybrid ARMS, according to Realtor.com. Due to the increased risk associated with fluctuating payments, 5/1 ARMS usually have lower introductory interest rates than traditional 30-year fixed-rate mortgages.
Based on Indexes
The annual interest rate changes of a 5/1 ARM are tied to a specific index. The three major indexes that impact rates are the one-year Treasury Bill, the 11th District Cost of Funds Index, or COFI, and the London Interbank Offered Rate, or LIBOR.