Current 5/1 ARM Mortgage Rates | Mortgages and Advice

U.S. News Expert Insights

“Mortgage rates retreated further this week as incoming data on inflation and the labor market continues to point to a cooling economy. In its December meeting, the Federal Reserve elected to hold the federal funds rate at 5.25% to 5.5%, where it’s been since July. It appears that the Fed’s rate-hike cycle has likely come to an end, so now investors have turned their attention to when rate cuts might come next year.

“Although mortgage rates seem to have peaked, prospective homebuyers should still temper their expectations. The rate on a 30-year fixed mortgage isn’t likely to return to record-low territory anytime soon, if ever again: Most forecasters believe that rates will stay above 6% throughout 2024. As long as the economy keeps humming along at a steady pace, rates will stay elevated. But considering that rates were nearly 8% just over a month ago, it’s evident that housing affordability is on the right track.”

– Erika Giovanetti, U.S. News Loans Expert

An adjustable-rate mortgage, or ARM, is a home loan with an interest rate that can change over the life of the loan. The most prevalent type of adjustable-rate mortgage is called a hybrid ARM. There is an initial interest rate on the loan for a set period of time before the interest rate can change. Hybrid loans are expressed as a fraction: The first number tells the length of time in years the interest rate will remain fixed and the second number tells how often the interest rate will adjust after the fixed period.

With a 5/1 ARM, the initial interest rate is locked in for the first five years of the loan and then it is subject to change once per year after that. The most common fixed-term periods for hybrid loans are three, five, seven and 10 years.

To calculate the interest on your loan after the fixed-rate period, lenders use a benchmark index as a measure of interest rates. Many lenders use the Constant Maturity Treasury index or the U.S. prime rate, according to the Consumer Financial Protection Bureau.

Lenders will also add a margin, or an extra percentage, to the index. Margins are determined by a number of factors, including the amount of the loan and your creditworthiness. Margins may vary from lender to lender, so it’s a good idea to shop.

Adjustable-rate mortgages include several kinds of caps to control how high or low your interest rate can go.

Just like margins, rate cap structures may vary from lender to lender, so be sure to shop around for different rate caps.

An adjustable-rate mortgage typically will start with a lower interest rate than a fixed-rate mortgage. It can be risky to stick with an ARM since you don’t know how much the interest rate will increase after the fixed period.

You can refinance before your fixed-rate period is over, but that comes with its own drawbacks. You’ll need to pay closing costs to refinance, and it’s not guaranteed that rates will have fallen in the meantime. Your financial situation could also change, and you could have trouble qualifying for more competitive rates if you refinance.

It may make the most sense to get a 5/1 ARM if you plan on selling your home before the fixed-rate period is over. If you sell your home before your rate adjusts, you reduce the risks of rising rates and higher monthly payments.

When you shop for an adjustable-rate mortgage, the two most important aspects to know are the margin the lender charges and the structure of its rate caps. The lower the margin is, the less your monthly payment will be.

The rate cap structure can vary from lender to lender. For example, some lenders may have an initial adjustment cap of two percentage points, while others may set it to five percentage points. The lifetime adjustment cap is most commonly five percentage points, though some lenders may set it higher. It is important to note since it represents the maximum amount the interest rate can increase across the entire life of the loan.

The repayment structure of an adjustable-rate mortgage can be complex, so make sure you understand the terms of your loan before signing. Here are some key questions you should be able to answer about your adjustable-rate mortgage
:

Unlike an adjustable-rate mortgage, a fixed-rate mortgage has a locked-in interest rate for the entire life of the loan. Although the introductory period of an adjustable-rate mortgage may have a lower interest rate, a fixed-rate mortgage comes with the stability of knowing your monthly payments will never increase. You can also refinance your fixed-rate mortgage if interest rates drop below your current rate.

Whether a fixed- or adjustable-rate mortgage is best for you depends on your situation. If you plan on selling your house before the introductory period is over, you expect an increase in future earnings or you have confidence in refinancing your loan, an adjustable-rate mortgage may be right for you. If you’re not looking to sell your home in the foreseeable future and you want more stability in your mortgage, a fixed-rate mortgage may be better.