If you’re familiar with adjustable rate mortgages (ARMs), you’ve probably heard of 5/1 ARMs or even 10/1 or 1/1 ARMs. There’s a newer ARM loan available that ‘s gaining popularity: the 5/5. Here’s everything you need to know about this unique loan product.
What is it?
The first number on an ARM refers to how long the initial fixed- rate term lasts , and the second number indicates how often the mortgage interest rate adjusts after that. So, a 5/5 ARM has a fixed rate for the first 5 years and adjusts every 5 years thereafter.
While adjustable rates can be hard on your budget, there are certain limits and caps within the loan. Understanding these from the start will help ensure that you can afford to repay the loan, even at the higher interest rates . The average interest rate cap for the first interest rate adjustment is 2%. For example, if your initial interest rate is 3.5%, the most your interest rate can increase or decrease over the course of a loan year will be 2%, bringing you to the 5.5% cap.
There are also periodic rate caps and lifetime rate caps. The cyclical one is also usually around 2% and applies to subsequent rate increases. The interest rate can only increase up to a certain level over the life of the mortgage , usually around 5%. If your original interest rate is 3.5% and your lifetime cap is 5%, the highest interest rate your loan can reach is 8.5%.
All ARMs adjust based on a specific market index, usually the LIBOR index. Most ARMs come with a minimum rate or spread requirement. This is usually 2%. This protects the lender if the market index ever falls too low. If the initial rate is low, you may never see the rate drop even if the market index goes down.
benefits
The main benefit of any ARM is that the initial rate is typically lower than fixed-rate mortgages. 5/5 ARMs are great for those who don’t plan on staying in their home for more than a decade, but perhaps longer than 5 years. This gives them only one rate adjustment period during that time and plenty of opportunity to refinance or sell . Compared to the 5/1 ARM, where the rate adjusts annually after the first 5 years, the 5/5 limits the amount of additional interest you could pay over the next half-decade.
Even if you plan to stay home for a long time , 5/5 means fewer adjustments, giving you more time to prepare for the next potential increase.
The disadvantages
However, there are potential drawbacks to this loan product. 5/5 ARMs tend to phase in at a slightly faster rate than 5/1 ARMs. For example, if you get a 2.5% interest rate on 5/1, you’ll get a 3.5% interest rate on 5/5. If you move or refinance within the first five years, you’ll save even more money with a 5/1 interest rate.
Additionally, the interest rate cap could be raised to 5/5. The 5/5 ARM has a 2% interest rate adjustment cap, while the 5/1 ARM has an interest rate adjustment cap of just 1%. Of course, the 5/1 rate can continue to adjust annually thereafter, but there is still a risk that the 5/5 rate will be higher than the 5/1 rate in future years.
A 5/5 ARM may be safer in some ways than an ARM that adjusts annually. It depends on how long you plan to live in the home and how the interest rate environment changes over the life of your loan. Make sure you understand all ARM limitations before making a decision.
If you have any questions or think a 5/5 ARM mortgage may be right for you or someone you know, call Finance USA Corporation today at 703-941-4022 and apply for a 5/5 ARM mortgage today. If you are interested in an ARM loan.
