A mortgage program in which the interest rate remains the same for the initial 5 years. At the end of the fifth year, the mortgage turns into an Adjustable Rate Mortgage for the remainder of the loan term. Payments of most 5-Year Fixed Rate Hybrids are amortized for 30 years.This loan program is named "5/1 Hybrid" because it starts out as a Fixed Rate Mortgage (FRM), then changes to an Adjustable Rate Mortgage (ARM). For this reason, it is also commonly referred to as the "5/1 ARM".
This is also called a 5/1 ARM meaning that the rat is fixed for the first 5 years and adjusts 1 a year every year after that.
When the adjustment period begins there is a cap for how much the rate can adjust in the first year, and each year after that. These loans also have a cap for the life of the loan as well as a floor rate, which is the lowest rate the loan could ever have.
The hybrid or ARM loans are a great option to save money on your monthly payment especially when used in the right situations. If you plan on moving within the next 5 years, there is no reason to obtain a higher rate mortgage that is fixed for the life of the loan instead of a 5 year fixed rate loan.
In most cases, mortgage rates are higher when the "fixed" period is longer. In other words, a 30-Year Fixed Rate mortgage usually carries an interest rate higher than a 5-Year Fixed Hybrid (5/1 ARM). For home buyers who do not intend to keep their mortgages for more than 5 years, a 5/1 ARM is usually a smarter choice because of its lower initial interest rate.
If you think you may need a ARM with a longer fixed term ask your mortgage broker about a 7 or 10 year ARM. The rates may not be as good as a 5 year ARM but they are still lower then a fixed rate loan.
For the past ten to fifteen years, this has been one of the most popular loan programs on the market. The reason for this is simple. The average mortgage loan in the United States is kept less than five years. In these days of frequent refinancing and frequent moving from one home to another this loan will make much more sense than a long term fixed program such as a thirty year fixed. With this program borrowers can save thousands of dollars in interest over the five year period when compared to the traditional thirty year fixed.
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