The interest rate as well as monthly payment of most Adjustable-Rate Mortgages change every year, every three years, and so forth. The period between one rate change and the next change is called the “adjustment period”. Therefore, a loan with an adjustment period of Five (5) Years is called a 5-Year ARM (aka 5/1 ARM), and the rate can change or adjust every year AFTER the initial 5 years for the remaining life of the loan.
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A 5/1 ARM is not only common but is perfect for the consumer who desires to have the predictability of low monthly payments for the first five years of their mortgage. After that, mortgage rates will adjust annually with the market fluctuations for the balance of the loan term. This option may also be good for consumers if they plan on selling their home after a few years. Another benefit is that if the consumer needs a few years to pay off debts, etc. before having to make larger payments on their mortgage. As with any Adjustable-Rate Mortgage plan, the initial interest rate will be lower than a fixed-rate mortgage plan. Consumers should keep in mind though that after that first five years of lower payments, their payments can change, sometimes significantly. It is of utmost importance that consumers are able to pay their monthly payments accordingly to avoid potential foreclosure. Then, there is also the possibility to either sell, move, or refinance for a different adjustable-rate mortgage or even a fixed-rate mortgage AFTER the first five years of the 5/1 ARM.
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About 5-Year Adjustable Rate Mortgages
After the First Five Years, How Long Will Payments Have to be made?
The majority of 5/1 ARMs are paid (fully amortized) in thirty years.
Is There Any Difference Between a 30-Year Fixed-Rate mortgage and a 5/1 ARM?
Yes. With a 5/1 ARM, only the first five years are fixed, whereas with a 30-Year Fixed-Rate mortgage, all thirty years are fixed.
Are There Any Special Kind of Down Payment Requirements for a 5/1 ARM?
Depends on what lender you choose, but typically, many lenders likely will expect a down payment of 5-10% of the purchase price of the home.
If Interest Rates Skyrocket After the Initial 5-Year Rate Period is Over, What Recourse Would a Consumer Have? A consumer can always consider refinancing at this point should the payments become unbearable.
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