What is a 5/1 mortgage?
Nov 11, 2008 Type
A 5/1 mortgage can be a 5/1 hybrid adjustable-rate mortgage (ARM) or a 5/1 jumbo mortgage. This type of 5/1 mortgage is the most popular among borrowers because of its low interest rates and a fairly long fixed rate period. A hybrid 5/1 ARM has an initial five-year fixed-interest rate, after which the rate starts to adjust annually depending on a fully indexed interest rate. This rate can reach its maximum adjustment is limited by an interest rate cap.
Since each load is tied to a financial index, borrowers should need to check available indexes first to see how high or low the interest rate can be. Several adjustable loans have a periodic rate cap of only one percent although there are some that exceed this rate cap. Verifying interest rates is necessary so as to avoid getting loans with a huge adjustment
To be able to arrive at the comparative advantage of 5/1 ARM over a 30-year fixed0rate mortgage, borrowers should consider that the interest rate also depends on the slope of the yield curve. But it is an increasingly attractive opportunity for borrowers to prefer 5/1 ARM when refinancing or moving before the period of a fixed interest rate expires.
Another type of 5/1 mortgage is the 5/1 jumbo mortgage, which also has an initial rate effective for five years. Like the 5/2 hybrid ARM, the rate of 5/1 mortgage is also adjusted annually.
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