• Discounts and special offers
  • Subscriber-only articles and interviews
  • Breaking news and trending topics

Already a subscriber?

By signing up, you accept Moneywise's Terms of Use, Subscription Agreement, and Privacy Policy.

Not interested ?

Man signing mortgage agreement

Compare today's 5-year ARM rates

David Gyung / Shutterstock

Partners on this page provide us earnings.

Ten-year, fixed rate mortgages, 5 year ARMs, variable rates, interest rates, amortizations - there’s a lot to know, understand and choose from when you are buying a home. Many home buyers opt for a 5-year ARM, which is a type of adjustable rate mortgage. Understanding what a 5-year ARM is and the benefits and downsides of this variable rate option will help guide you to decide whether a 5-year ARM is the right choice for you. 

Mortgage Type
Average Interest Rate
Average APR
5-year ARM
6.38%
7.47%
7-year ARM
6.55%
7.42%
30-Year Fixed Rate
6.59%
6.67%
20-Year Fixed Rate
6.39%
6.50%
10-Year Fixed Rate
5.90%
6.15%
30-Year Fixed Rate FHA
5.88%
6.99%
30-Year Fixed Rate VA
6.07%
6.32%
30-Year Fixed Rate Jumbo
7.26%
7.34%

Data compiled from Zillow.com and current as of July 31, 2023

What is a 5-year ARM?

A 5-year ARM is a fixed rate of interest for the first five years of your mortgage. After that, your terms switch to an adjustable-rate, meaning that it goes up or down depending on interest rates. Often, an ARM offers a lower introductory interest rate compared to fixed-rate mortgages as it rates are less reliable. 

Adjustable-rate mortgages, sometimes called variable rate mortgages, change with each adjustment to prime rate. If the Federal Reserve increases federal funds rates, interest rates on your mortgage typically also goes up. This means your monthly payments go up, as well. 

How does a 5/1 ARM work?

If you have a 5/1 ARM, the rate changes every year after the five years are up. If you have a 5y/6m rate, your rate changes every six months after the first five years. Offers vary by lender so, if you’re comparing different offers, make sure you’re comparing the same type of loan.

Most ARMs come with cap limits, or a limit on how much your interest rate can increase both annually and over the life of your loan. 

  • Periodic rate cap: This is the limit to how much a rate can increase at every interval. For 5/1 ARMs, that would be every year.
  • Lifetime rate cap: This is how much the interest rate can increase over the total life of your loan. 
  • Payment cap: This is how much a payment can increase based in dollars rather than percentages.

Is a 5/1 ARM loan right for you?

An adjustable-rate mortgage isn’t for everyone. You should consider getting a 5-year ARM if you:

  • Plan to move before the end of the introductory period.
  • Think the interest rates could go down.
  • Want to get a lower initial monthly payment compared to fixed-rate offers.
  • Expect your income to increase and will be able to absorb larger payments down the line.

You should look into 5/1 ARM alternatives if:

  • You plan on staying put.
  • Interest rates are climbing.
  • You want the same, reliable monthly payment for the life of the loan regardless of market conditions.

5/1 ARM Pros and Cons

Pros

Pros

  • Lower initial interest rate compared to fixed-rate loans.

  • Could pay less in total interest over the life of your loan.

  • Good option for short-term home purchases.

Cons

Cons

  • Might pay more in interest after the introductory period ends.

  • Market conditions could raise the interest rate to unaffordable payments.

  • Payments may not go down, even if interest rates do.

How to get a 5/1 ARM

If you’re exploring different interest rates for your mortgage, a 5/1 ARM might be on your radar. Here’s how to get a 5/1 ARM for your next mortgage.

  1. 1.

    Check your credit. You can pull your credit report for free at AnnualCreditReport.com, getting reports from each of the three major credit bureaus. See what lenders will see before they do and take some time to improve your credit score before completing a mortgage application. 

  2. 2.

    Compare lenders. While lenders give the lowest interest rates to borrowers with excellent credit, you can still get approved for a loan with good or fair credit. Regardless of your credit score, you should compare lenders to see which ones offer the lowest interest rate, fewest fees, and other charges. Try to look at the APR from all lenders you’re looking at, since APR includes the interest rate and any fees included in the total cost.

  3. 3.

    Increase your down payment. A larger down payment means you could get a lower monthly payment. While a 20% down payment isn’t always required, it does remove private mortgage insurance (PMI) from kicking in — an extra charge you’ll pay until you’ve hit 20% equity in your home.

  4. 4.

    Complete an application. Having a pre-approval lender tells sellers you’re serious about making an offer. They’re usually good for a couple of months but having one handy can expedite your home-buying search. Only complete an application if you’re ready to buy a home.

  5. 5.

    Make an offer. With a pre-approval letter in hand, it’s time to make an offer on a home. After you’ve agreed to terms with the seller, your lender will trigger another application to get final approval. It’s important not to make any large purchases or changes to your financial situation between your pre-approval and final approval. Otherwise, you could risk getting denied for your final loan.

  • Why are 5/1 ARMs referred to as hybrids?

    +

    Adjustable-rate mortgages, or ARMs, are considered hybrids because for the first few years of your loan, you’re paying a fixed interest. The rate changes after five years and becomes an adjustable rate thereafter. You’re essentially paying both a fixed-interest and a variable interest on the same loan.

  • What is a 5/1 ARM interest-only loan?

    +

    This type of loan is when you make payments on only the interest for the first five years of your loan. After that, monthly payments include your interest and principal payments. This means you’ll pay more every month.

  • How do you find the best 5-year mortgage rates?

    +

    Comparing lenders will help you find the best 5-year mortgage rates, along with other lenders for other types of interest rate offers. Check your credit to see what lenders will see when they pull your report. This will show you what sort of offers you can expect, including potential interest rates based on your credit score, income, and the neighborhoods you’re looking to buy in.

  • What's the difference between a 5/1 ARM and 7/1 ARM?

    +

    The difference between a 5/1 ARM and a 7/1 ARM is the initial fixed-rate interest period. A 5/1 ARM is when you pay a fixed interest for the first five years of your loan with an adjustable rate every year after that. A 7/1 ARM is when you pay a fixed interest rate for the first seven years of your loan and then it changes to an adjustable rate annually after that.

  • Can I pay off a 5/1 ARM early?

    +

    There’s a chance you could pay a prepayment penalty if you pay off your 5/1 ARM too early. Every lender has different fees associated with paying off your loan early and in some cases, you could be hit with a fee if you refinance before the fixed interest rate period is up. Prepayment penalties are usually a percentage of how much is left on your loan, which could be thousands of dollars. Ask your potential lenders what fees you may face if you pay off your loan early or refinance.

  • Can I refinance a 5-year ARM?

    +

    You can refinance a 5-year ARM like you would any other mortgage. Remember that refinancing is when you take out a new loan to replace your current one. It comes with new repayment terms and a new interest rate (which isn’t guaranteed to be lower than what you’re paying right now). It also comes with closing costs, just like your original mortgage did. Keep in mind the total cost of refinancing before you complete an application.

Dori Zinn Freelance Contributor

Dori Zinn is a freelance contributor to Moneywise.

Disclaimer

The content provided on Moneywise is information to help users become financially literate. It is neither tax nor legal advice, is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Tax, investment and all other decisions should be made, as appropriate, only with guidance from a qualified professional. We make no representation or warranty of any kind, either express or implied, with respect to the data provided, the timeliness thereof, the results to be obtained by the use thereof or any other matter.