Point of Interest
Adjustable-rate mortgages (ARMs) are becoming more common as homebuyers look to lock in the lowest rates upfront and then capitalize on variable mortgage rates for the remainder of their term. One of the most popular types is the 5/1 ARM — which offers five years of fixed-rate interest followed by a variable rate that adjusts once per year.
5/1 ARM loans offer the benefit of fixed rates for first-time homebuyers, along with the flexibility to refinance to a new ARM or a conventional fixed-term loan after the initial term is up. While there are other ARM choices — including 3/1 and 7/1 ARMs — the 5-year option remains the most popular among homebuyers for its ideal mix of fixed starting rates and flexibility over time.
With a host of ARMs available, which lender offers the best fit for your finances? Here’s a look at the best 5/1 ARM rates and lenders of 2020.
The 5 best 5/1 ARM loan lenders of 2020
- SunTrust Mortgage — Best for multiple ARM options
- New American Funding — Best for low interest rates
- Quicken Loans — Best for new or first-time homebuyers
- Guild Mortgage — Best for financing with a low down payment
- Chase Bank — Best for in-person lending
|Minimum Deposit||Minimum Credit Score||Current 5/1 ARM Rate|
|New American Funding||Not listed||Not listed||Not listed|
|Quicken Loans||Not listed||Not listed||Not listed|
|Guild Mortgage||3.5%||580||Not listed|
· Current as of 6/24/20
What are 5/1 ARMs?
Also called 5-year ARMs, a 5/1 ARM mortgage has two parts: the initial, fixed-rate part of the loan, which lasts five years, and the second, variable part of the loan. In most cases, 5/1 ARMs are 30-year mortgages, meaning you’ll have five years of fixed interest followed by 25 years of variable rates.
Once the fixed-rate portion of your loan expires, your rate adjustment is governed by your mortgage agreement. In most cases, rates will adjust once per year — either up or down — depending on market conditions. Specific factors used to assess rate adjustments include the cost of funds index (COFI), the constant maturity treasuries (CMT), and more recently, the secured overnight financing rate (SOFR). Over the last few years, variable rates have been steadily trending upward.
If you find your ARM rate getting too high, you’ve got options. You can choose to ride out the market and hope for lower rates, or you can refinance with either a new ARM or convert to a fixed-rate mortgage. Bear in mind, however, that refinancing often comes with upfront fees and closing costs, and in some cases may require a home inspection. Additionally, fixed mortgage rates are typically a percent (or more) higher than standard ARM rates.
Why should I get a 5/1 ARM?
A 5/1 ARM offers two key benefits: lower initial interest rates and the potential to pay less on your mortgage. Because ARMs are designed to fluctuate after the first five years of their term, lenders typically offer 5/1 ARM rates at just under the 3% interest mark.
Homeowners can also use their 5/1 ARM to get ahead on paying back their mortgage principal. Here’s how it works. Homebuyers compare the monthly cost of a 5/1 ARM to a fixed mortgage to see how much they’re saving initially. Then, they apply this difference directly to the principal. In effect, they’re paying the same amount per month as they would with a fixed-rate loan, but more of their money is going to the principal of their loan to reduce the total length of their mortgage. Check out our mortgage calculator to see the difference.
Tip: If you plan to renovate and sell your home within five years — or plan to relocate during the fixed term — you can get the most from your 5/1 ARM without ever paying the variable rate.
5/1 ARM vs. 15-year fixed mortgage
If you prefer predictability, a 15-year fixed mortgage makes it easy to know exactly what you’re going to pay every month. It gives you the option to refinance for another 15 years when the term is up or convert to a variable rate mortgage. The drawback? A 15-year fixed loan comes with higher interest rates than its 5/1 ARM counterparts, meaning you could end up paying substantially more in interest over time. Keep in mind, though, that you always have the option to refinance your ARM mortgage if the rates adjust too high. While you may be on the hook for some fees and closing costs with a refinance, you’ll typically benefit over the long term.
Tip: If the potential rate risk of an ARM isn’t for you, consider a 30-year fixed term for maximum stability.
5/1 ARM vs. 7/1 ARM loan
5/1 and 7/1 ARMs differ in their fixed-term lengths. This makes 7/1 ARMs a potentially beneficial option since you get a full seven years at a fixed rate that’s lower than most 15-year or 30-year fixed-rate mortgages. This longer fixed-rate term lets you save more money over time and potentially pay down more of your principal. However, it comes with a higher initial interest rate to offset the longer fixed term.
Tip: If you like the idea of a 5/1 ARM but want less fluctuation, consider a 5/5 ARM, which offers a five-year fixed term and then adjusts just once every five years.
The final word
5/1 ARMs are effectively a hybrid mortgage. Part fixed- and part adjustable-rate, they offer some benefits of both and are ideal for homebuyers looking to get ahead on their principal payments or buyers who have plans to move in the near future. The best 5/1 ARM rates of 2020 are some of the lowest rates on the market — lower than comparable 15-year fixed or 7/1 ARM options — and you’re always able to refinance your mortgage if yearly rate adjustments become too costly. Bear in mind, however, that regular refinancing with a new ARM or a fixed-rate mortgage can carry substantial processing fees and closing costs.