A 5/1 adjustable-rate mortgage, or ARM, combines a five-year initial fixed-rate period with annual rate adjustments afterward. That gives you several years before the first possible adjustment without fixing the interest rate for the entire loan term.
The five-year structure falls between shorter options such as a 3/1 ARM and longer initial periods such as 7/1 and 10/1 ARMs. The actual cost depends on the interest rate, APR, fees and adjustment terms available with the loan.
5/1 ARM Basics
| Feature |
How a 5/1 ARM Works |
| Initial fixed-rate period |
5 years |
| First possible adjustment |
After the initial 5-year period |
| Adjustment frequency |
Once per year after the initial period |
| Adjusted rate |
Generally based on an index plus a margin, subject to the loan terms |
| Rate caps |
Limit how much the rate can change at the first adjustment, later adjustments and over the life of the loan |
| Principal-and-interest payment |
Can change after the initial period if the interest rate changes |
How a 5/1 ARM Works
The numbers in a 5/1 ARM describe the interest-rate schedule. The “5” means the initial interest rate stays fixed for five years. The “1” means the rate can adjust once per year after those five years.
During the initial period, the mortgage interest rate does not change. Your scheduled principal-and-interest payment will generally remain the same during those five years.
Your total monthly housing payment can still change if property taxes, homeowners insurance, mortgage insurance or escrow requirements change.
After year five, the mortgage enters its adjustable period. The interest rate can then change annually according to the loan's index, margin, rate caps and any applicable floor.
What Happens After 5 Years on a 5/1 ARM?
After the initial fixed-rate period ends, the first adjustment is generally calculated using a market-based index plus the margin specified in your loan agreement.
The index changes with broader market conditions, while the margin is set in the loan agreement and generally does not change after closing.
If the resulting interest rate rises, your principal-and-interest payment can increase. If the index declines, the rate may decrease, depending on the mortgage's caps, floor and other terms.
How Rate Caps Work on a 5/1 ARM
Rate caps limit how much an ARM's interest rate can change. They do not prevent the rate from increasing or decreasing, but they set contractual limits on those adjustments.
The CFPB identifies three common types of ARM rate caps:
- Initial adjustment cap: Limits how much the rate can change when the initial five-year period ends.
- Subsequent adjustment cap: Limits how much the rate can change at later annual adjustments.
- Lifetime adjustment cap: Limits the total rate change allowed over the life of the mortgage.
Some ARMs also have a floor that limits how far the interest rate can fall. The specific caps and any floor depend on the mortgage, so review the terms shown in your loan disclosures.
How a 5/1 ARM Compares With Other ARMs
Different ARM structures primarily change how long the initial rate stays fixed and how frequently adjustments can occur afterward.
5/1 ARM vs. 7/1 ARM
Both structures can adjust annually after their initial periods. A 5/1 ARM reaches its first possible adjustment after five years, while a 7/1 ARM keeps its initial rate for seven years. The difference between a 5/1 and 7/1 ARM also depends on the actual pricing, fees and caps available with each loan.
5/1 ARM vs. 10/1 ARM
A 10/1 ARM delays its first possible adjustment for five additional years compared with a 5/1 ARM. Both can adjust annually once their initial fixed-rate periods end, so comparing a 5/1 and 10/1 ARM involves weighing that additional fixed period against the actual terms offered.
5/1 ARM vs. 5/6 ARM
A 5/6 ARM also has a five-year initial fixed-rate period. The difference appears afterward: a 5/1 ARM can adjust annually, while a 5/6 ARM can adjust every six months. That adjustment schedule is the central distinction when comparing 5/1 and 5/6 ARMs.
5/1 ARM vs. Fixed-Rate Mortgage
A 5/1 ARM keeps its interest rate fixed for five years before annual adjustments can begin. A fixed-rate mortgage keeps the same interest rate for the entire loan term.
| Feature |
5/1 ARM |
Fixed-Rate Mortgage |
| Interest rate |
Fixed for 5 years, then adjustable |
Fixed for the loan term |
| First possible rate change |
After the initial 5-year period |
No scheduled rate adjustment |
| Principal-and-interest payment |
Can change after the initial period |
Does not change because of market interest rates |
| Rate caps |
Limit permitted adjustments |
Not applicable |
A 5/1 ARM does not automatically have a lower initial rate or payment than a fixed-rate mortgage. Actual pricing varies with market conditions, the loan program and your financial profile.
Advantages and Disadvantages of a 5/1 ARM
Potential Advantages
- Five-year initial period: The interest rate does not adjust during the first five years.
- More time before adjustments than a 3/1 ARM: The first possible rate change comes two years later.
- Potential pricing difference: Depending on market conditions and lender pricing, a 5/1 ARM may be priced differently from longer-period ARMs or fixed-rate mortgages.
- Rates can decrease: After the initial period, the rate may decline if the underlying index falls and the loan terms allow it.
Potential Disadvantages
- Future payment uncertainty: Your principal-and-interest payment can increase after five years if the rate rises.
- Plans can change: Selling or refinancing before the first adjustment is not guaranteed.
- More terms to evaluate: The index, margin, caps and any rate floor affect how the mortgage can adjust later.
Who Might Consider a 5/1 ARM?
A 5/1 ARM may be worth comparing if a five-year initial fixed-rate period fits your expected timeline and you are comfortable with the possibility of later rate and payment changes.
You may expect to move, refinance or pay off the mortgage before the adjustable period begins. Those plans can factor into the comparison, but the mortgage should also remain manageable if your timeline changes.
The potential payment after the initial period is especially useful to consider. An ARM risk calculator can illustrate how different rate changes could affect your principal-and-interest payment.
What to Compare Before Choosing a 5/1 ARM
Two 5/1 ARMs can follow the same five-year-and-annual-adjustment schedule while having different rates, margins, caps and costs.
Compare:
- The initial interest rate and APR
- The first adjustment date
- The index
- The margin
- The initial adjustment cap
- The subsequent adjustment cap
- The lifetime adjustment cap
- Any applicable interest-rate floor
- Points and lender fees
- The maximum possible principal-and-interest payment
An adjustable-rate Loan Estimate shows additional information about how the interest rate and payment can change. Comparing those terms across offers can give you a clearer picture than looking at the initial rate alone.
Bottom Line
A 5/1 ARM has an interest rate that stays fixed for five years and can adjust annually afterward. Future adjustments generally depend on the loan's index, margin, caps and any applicable floor.
Compare the actual interest rate, APR, fees, adjustment terms and potential future payment before choosing a 5/1 ARM over another mortgage structure.
Frequently Asked Questions
What Does 5/1 Mean in an ARM?
The “5” means the initial interest rate stays fixed for five years. The “1” means the rate can adjust once per year after the initial period ends.
What Happens After 5 Years on a 5/1 ARM?
The interest rate becomes eligible for annual adjustments. The adjusted rate is generally based on the loan's index plus margin, subject to rate caps, any applicable floor and other loan terms.
Is a 5/1 ARM the Same as a 5/6 ARM?
No. Both have an initial five-year fixed-rate period. A 5/1 ARM can adjust once per year afterward, while a 5/6 ARM can adjust every six months.
Can a 5/1 ARM Payment Increase?
Yes. If the interest rate increases after the initial five-year period, the principal-and-interest payment can also increase. Rate caps limit how much the rate can change under the mortgage terms.
Can a 5/1 ARM Rate Go Down?
It can. If the underlying index declines, the adjusted rate may decrease, depending on the mortgage's margin, caps, floor and other terms.
Is a 5/1 ARM a 30-Year Mortgage?
The 5/1 designation describes the interest-rate schedule, not the total repayment term. A 5/1 ARM can have a longer repayment term, such as 30 years, with the first five years fixed and later years subject to annual adjustments.
Can You Refinance a 5/1 ARM Before It Adjusts?
Yes, if you qualify for a new mortgage. Refinancing replaces the existing loan and can involve closing costs, so future rates, loan terms and costs affect whether refinancing makes financial sense.
.jpg?quality=80&width=150)
