5-1 ARM vs. 30 Year Fixed Rate Mortgage


5-1 arm vs 30 year fixed

There is a lot to think about if you are deciding between getting an adjustable rate or a 30-year fixed-rate loan.

This article takes an in-depth look at how adjustable-rate and fixed-rate mortgage loans differ so you can decide which loan term is best for you.

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What is a 5-1 ARM?

A 5-1 hybrid ARM (5-1 hybrid adjustable-rate mortgage) is a type of adjustable-rate mortgage term with a very low initial rate for a fixed period. After the initial 5 year period, the rate increases annually.

The first number is the fixed-rate period, where 5 refers to the amount of years with a fixed rate. The second number is the rate at which the interest rate increases, 1 being every year. The 5-1 ARM is just one type of adjustable-rate mortgage; many other terms are available.

Why would anyone want an adjustable-rate mortgage?

It’s quite simple, really. The initial fixed rate is usually much lower than you would receive with a fixed-rate mortgage. With a 5-1 ARM, the first 5 years of the mortgage will have a rate as much as 1% – 1.5% lower than a fixed rate.

This will result in a lower monthly payment and more of that payment going to your principal balance. After the initial 5 years, that great low rate will increase year after year.

Over the first 5 years of a 5-1 ARM, you will save a nice chunk of money. If you’re someone who is planning on paying off your mortgage within 5 years, then an adjustable-rate mortgage is a no brainer. It will have the lowest interest rate, saving you the most amount of money. You don’t have to worry about the interest rate increases after the five year period.

However, if you’re not planning on paying off your mortgage in 5 years, you may want to think twice before getting an adjustable-rate mortgage. Depending on what happens to interest rates over time, the interest rate hike could be much higher than you expected.

You could be able to refinance at the end of the initial 5 year fixed rate period. However, many borrowers prefer to lock in their rate over the full term of their loan with a 15 year or 30-year fixed-rate mortgage.

5-1 ARM Advantages

  • Low initial interest rate
  • Lower monthly mortgage payments
  • Pay more towards principle in the first 5 years
  • Can qualify for a more expensive home

 

30 Year Fixed Rate Mortgage Loan

The 30-year fixed-rate loan is the most common mortgage term there is. It’s the easiest to understand, and it’s a safe bet for the typical homeowner who is not going to pay off their mortgage anytime soon. With a 30 year term, you can lock in your interest rate for the life of the loan. While the prime rate goes through unpredictable highs and lows, your mortgage rate stays the same.

Many people blamed adjustable-rate mortgages for the 2008 housing market crash. While that wasn’t the only reason for the crash, it is partly true. The safety and security of a fixed-rate mortgage ensure no changes in your payment and no surprises down the road.

30 Year Fixed-Rate Advantages

  • Locked-in interest rate
  • No interest rate hike
  • Predictable monthly payment
  • Take advantage of today’s low-interest-rate

15 Yr Fixed-Rate Mortgage Loans

A 15 year fixed rate mortgage works just like a 30 year fixed rate. You will have a locked-in interest rate for the full 15-year term of the loan. 15 year fixed rate loans often have a much lower rate than a 30-year loan, making them appealing. However, your monthly mortgage payment will be higher than it would with a 30-year term.

Which is Better 30 Year Fixed Rate or 5-1 ARM?

This will depend on your individual situation because a 5-1 ARM has a low initial interest rate for the first five years. If you plan on paying off your loan within 5 years, it is a great option.

If you are someone who is not paying off their mortgage in the next 5 or 10 years, then the security of the locked-in payment of a fixed-rate mortgage may be the better option.

As always, you should speak to an experienced loan officer to go over all of your available options.

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