What exactly is 5/1 Arm (Loan)?

Asked by John Young, Copperhill, TN Mon Jul 29, 2013

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6
Debra (Debbi…, Agent, Livingston, NJ
Tue Jul 30, 2013
you're right Greg - many think the max. cap can't be reached until after the 2% incremental caps kick in......it was actually news to me, too, when I investigated this for my son and daughter-in-law!

they are buying their first home, which they plan on living in for 5-7 years.....so.......they are going with a 7/1 - with caps of 2% (not the max) at each yearly adjustment period...max is capped at 5%.
The savings (close to $3000 a year) are high enough that even if they stay put for year 8 or 9, they will still be ahead.

Now that the 30 yr fix rate has gone up to the 4.5% ish range, ARM's can start to look attractive if one isn't planning on staying long term in the new home.

Good luck John, and, as Greg mentioned, make sure you have your lender explain all the details to you!
I'd also suggest you look at your long term plans and projected income potential when deciding on an adjustable rate loan. Make sure you can handle what that "max" might cost you down the road.
1 vote
Gregorio Den…, , San Diego, CA
Tue Jul 30, 2013
And to further expand on what Debra posted; the way you can tell what the caps are on the ARM you are being offered, is to ask. They are represented as follows.

Caps 5/2/5
The first 5 represents the max change on the FIRST adjustment (year 6)
The 2 represents the max change on subsequent adjustments
The last 5 represents the max change over the life of the ARM.

This means the max could be achieved on the first adjustment at year 6. Many people get this wrong. Most conforming LIBOR ARMS are 5/2/5 caps. FHA adjustable rate mortgages actually offer the best terms at 1/1/6.
1 vote
Debra (Debbi…, Agent, Livingston, NJ
Tue Jul 30, 2013
Another important feature of this kind of loan is that the "adjustment" periods are capped (often at 2%).

The adjustment period occurs after the 5 yr fixed period is up. This would mean that after 5 years, the most it could increase would be 2% for year #6.
Now, this can vary depending on the loan, so please check with your lender.

In addition...
There (usually) is a "lifetime" cap (often 5%) which limits how high, in total, the loan can go after the fixed period is up.
If a loan started at, for example, 4% and has a life time cap of 5% - that means, in the worst case scenario, the rate can go up to a max of 9% .
1 vote
Debra (Debbi…, Agent, Livingston, NJ
Tue Jul 30, 2013
well, there you go!
nice succinct summary
0 votes
Ruth and Per…, Agent, Los Gatos, CA
Tue Jul 30, 2013
Hello John:

Fixed for 5 years and then adjusts yearly.

Good luck

Ruth
Web Reference:  http://ruthandperry.com
0 votes
Matt Carter…, Agent, The High Sierra Market, NV
Tue Jul 30, 2013
It is a loan that has a fixed rate for the first five years (the 5 in the title), after which it adjusts once a year (the 1 in the title) for the remainder of the term. Typically the term of these loans is 30 years so the loan would have a fixed rate for five years and a n adjustable for 25 years.
0 votes
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