A 5/1 ARM Home Loan Provides Important Options

A 5/1 ARM Home Loan

When it comes to getting a home loan, there are plenty of options out there. However, different types of home loans come with different interest rates as well as requirements. Homebuyers can choose fixed-rate loans, adjustable rate loans, or the so-called ‘hybrid’ loans which combine adjustable and fixed-rate features into one loan. A good example is the 5/1 ARM. This type of mortgage loan blends a variable-rate feature and a fixed-rate feature into one home loan.  The “5” indicates that the interest rate for the loan remains fixed for the first years, and the “1” indicates that after the five years are over, the rate will adjust once every year until the loan is repaid.

A 5/1 home loan is ideal for people who aren’t planning to stay in the home for long. It could be a good decision to take a 5/1 loan instead of a 30-year fixed if you know you will move before the five-year fixed-period is over. It is also a good choice for individuals who can comfortably absorb a little unpredictability. The interest rate may or may not rise after the five-year period is over.

Index

After the initial fixed rate period, a 5/1 ARM home loan will have a variable interest rate that is determined by a specific financial index. There are different indexes used to determine the interest rate depending on the type of loan program. It could be the London Interbank Offered Rate (LIBOR), Treasury rate, Cost of Funds Index, or others. Adjusting to one of these rates could significantly change the original interest rate of a 5/1 ARM home loan. It's possible the mortgage interest rate will go up, but it could also go down.

Advantages

A 5/1 ARM home loan is designed to provide a lower interest rate initially. This interest rate will be fixed for the first five years of the loan. During this time, a mortgage borrower will know the exact amount they will be paying on their home loan each month. Once this period of time is over, their payments could change. This is a great mortgage for someone who only plans to live in a house for a short period of time. They may intend to sell it before the introductory interest rate changes.

Equity

A 5/1 ARM home loan could potentially help a borrower build equity faster in their property. This is because it will have a fixed, lower interest rate for the initial years of the loan. Many people are able to build equity by making higher mortgage payments during the initial fixed period of the home loan.  Paying more than the minimum scheduled payment allows the borrower to apply payments towards a portion of the principal balance.  

Refinance

At the end of the initial period of a 5/1 ARM home loan, a borrower could be in a position to refinance it. Many borrowers may try to switch from an adjustable rate mortgage to a fixed-rate mortgage. They may not want to have a changing index determining their monthly mortgage loan payment. This is attractive to borrowers who want to stay in their home for a long time. It will provide them with a fixed monthly mortgage payment.

When considering a 5/1 ARM home loan, borrowers should consider what they intend to do with the property. It's important for homeowners to realize a serious decision about their home’s financing will have to be made after five years. Their mortgage payment could increase or decrease. At this time, they could refinance into a fixed-rate mortgage loan. This is often ideal if a borrower intends to stay in their home for the long term. They could also sell their home to avoid changes in the mortgage payment. Some people also choose to simply pay whatever mortgage payment amount is required.

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