Mortgage Hack #18
How it works: 5/1 ARM is a type of adjustable-rate mortgage loan (ARM) with a fixed interest rate for the first 5 years. After the first 5 years, the 5/1 ARM switches to an adjustable interest rate for the remainder of the life of the loan.
The interest rate for Years 1-5 is a fixed rate. Generally, these are offered at a lower rate than a traditional fixed-rate mortgage.
Years 6-the life of the loan are subject to change every year. Rates are subject to change based on the state of the economy and cost of borrowing. Usually increases are capped at a certain rate.
The cost to the seller is based on the note rate minus the 3% for the first 12 months and the same for the 2% (13-24 months) and the 1% (25-36 months). To get the total cost from the seller, add all the differences in figures from the original monthly payment.
Benefit to Buyers:
Generally, these are offered at a lower rate than a traditional fixed-rate mortgage.
Ideal for buyers who will stay in home no more than 5 years.
Reference: 2022 Keller Mortgage LLC
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