What Is a 5/1 Adjustable Rate Mortgage (ARM)?

Written by Aja McClanahanFebruary 21st, 20234 minute read

Paying off an ARM early | Fixed-rate mortgage | What's the 5/1 ARM rate? | Types of 5/1 ARMs | Benefits | Drawbacks | FAQs

A 5/1 ARM is a hybrid mortgage product that combines features of a fixed-rate and adjustable-rate mortgage.

How does a 5/1 ARM work?

A 5-year adjustable-rate mortgage (5/1 ARM) has a "fixed" interest rate for the first five years of the loan (60 payments) and then adjusts annually for the next 25 years. The initial rate, known as a teaser rate, is typically lower than for a 30-year fixed-rate mortgage.

Home buyers who expect to sell or refinance, or their income to increase in the short term could benefit from the lower interest rate and monthly payments that a 5/1 ARM offers.

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5/1 ARM vs. fixed-rate mortgage

If you take out a 30-year mortgage, your expenses will depend on whether the interest rate is adjustable or fixed.

  • A 5/1 mortgage will have a fixed interest rate for only five years, then the rate will adjust annually for the remaining 25 years of the loan.
  • With a fixed-rate mortgage, your interest rate will stay the same for all 30 years — so will your monthly payments.

Fixed mortgage payments are generally more predictable than payments on ARMs — though rates for property taxes, insurance, or special assessments could affect your overall monthly payment.

However, the teaser rate on a 5/1 ARM will typically come in substantially lower than the rate for a 30-year fixed-rate mortgage. If you need a lower payment than the 30-year fixed rate is offering, then a 5/1 ARM might be a better option.

» SEE: More types of 5/1 mortgages

What's the 5/1 ARM rate?

You can compare 5/1 ARM estimates on sites like Zillow. But your lender will set the actual rate, based on the sum of the margin and an index rate. The rate will be reflected in your loan contract.

Your loan contract details terms such as the:

  • Length of your initial term
  • Teaser interest rate
  • Loan reset date
  • How often your interest rate adjusts
  • What factors and limitations can affect your interest rate (such as an index or interest rate cap)

Can you pay off a 5/1 arm early?

A 5-year adjustable-rate mortgage (5/1 ARM) can be paid off early. However, there may be a prepayment penalty. A prepayment penalty requires additional interest owing on the mortgage.

How can I calculate a 5/1 ARM mortgage payment?

Different types of 5/1 ARMs

With an interest-only 5/1 ARM, you'll pay just interest for five years, then have an annually adjustable rate for the remainder of the loan. Lenders that offer interest-only mortgages typically require a higher credit score and a larger down payment, as much as 20%.

On an interest-only loan, you’ll pay only the interest portion of the mortgage (NOT the principal) for an initial period. After the initial term, the loan converts to a traditional (principal PLUS interest) mortgage, but the interest rate is subject to change every year.

The Federal Housing Administration offers two 5/1 ARM options through approved lenders:

  • 1% increase annually, and 5% over the life of the mortgage
  • 2% increase annually, and 6% over the life of the mortgage

If you have good to excellent credit, you’ll have higher approval odds for an FHA 5/1 ARM. This loan option offers a lower down payment requirement (3.5%) and a lower initial interest rate.

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Why should you use a 5/1 ARM?

A 5/1 ARM is best for home buyers who want a lower initial monthly payment and expect their homeownership situation to change within five years in one of the following ways.

🚗 Moving within 5 years

If you'll live in your home for only five years, then the money spent on principal, interest, taxes, and insurance might not be worth it for you. An ARM can help preserve cash for your next move and down payment.

💰 Expecting cash influx

When your 5/1 ARM interest rate increases, so will your monthly mortgage payments. More cash on hand means more security. If you're expecting:

  • An income increase (e.g., because of a new job or raise), you might be able to cover a higher mortgage payment once your ARM resets
  • A windfall (e.g., inheritance or settlement), you could potentially pay your mortgage off before the rate resets

💸 Planning to refinance

Like moving, refinancing gives you an out of the loan before the higher rate sets in. After five years, you can choose a more predictable mortgage product that suits your needs.

5/1 ARM disadvantages

The teaser interest rates offered by a 5/1 ARM sound like a great deal — and they can be when you're just starting your loan payments. The downside is that your interest rate will be unpredictable after five years, and it could put you in a tough spot financially.

A short-term ARM might not be right for you if you expect:

  • The Federal Reserve to raise interest rates because of an economic downturn
  • Your household income will not increase
  • Your household expenses will increase


The 5/1 ARM floating interest rates are based on the margin (outlined in your loan agreement) and an index, which changes daily. Your loan will have a cap that limits how high your interest rate can go for a given period and for the life of the loan.

If you want to pay your mortgage off quickly, you should get a 15-year mortgage. The total cost of the loan, including interest paid, will be lower with a 15-year mortgage. If you’d like a lower monthly payment and don’t mind paying more interest over the life of your loan, then paying extra on a 30-year mortgage is better.