What Is a 5/5 ARM Mortgage?

Jim B.

A 5/5 ARM mortgage is a loan option for potential home buyers in which interest rates change, or are adjustable, after a period of time. In the case of a 5/5 ARM mortgage, the interest rate on the mortgage loan is adjusted after the fifth year of the mortgage. After that point, the interest rate is adjusted every five years until the term of the mortgage expires. This particular type of mortgage agreement is beneficial to those who plan to move out of the house after five years or expect increased revenue at some time in the future to pay for the higher mortgage installments.

A 5/5 ARM mortgage may benefit homeowners who plan to move after five years.
A 5/5 ARM mortgage may benefit homeowners who plan to move after five years.

Many people have the goal of owning a home, but relatively few have the capital necessary to buy a home outright. As a result, mortgage loans are useful instruments for those wishing to buy a house. A mortgage lender gives the buyer a loan that covers most of the purchasing price of the house, and the buyer pays the loan back, along with interest, in regular installments. Depending on the financial situation of the buyer, a 5/5 ARM mortgage might be a wise mortgage choice.

The specifics of a 5/5 ARM mortgage are right in the name itself. ARM is short for adjustable rate mortgage, which means the interest rate paid by homeowners on the mortgage loan will be adjusted, or changed, after time. This is opposed to a fixed rate mortgage, in which the interest rate remains the same for the life of the loan. In the case of 5/5 ARM, the rate stays the same for five years, then is adjusted in the sixth year and every five years after that.

When a home buyer chooses a 5/5 ARM mortgage loan, he usually benefits from interest payments that are initially low. As time passes, and each 5-year benchmark is reached, those rates will generally continue to rise, although usually in relatively small increments. By the end of the loan, the interest payments can be substantially higher than they were in the beginning.

Most first-time home buyers are still earning less income than they might be able to achieve later in their life. For this reason, a 5/5 ARM mortgage can be useful, since payments are light in the beginning and only begin to grow at a time when the buyers can usually handle the higher payments. On the other hand, buyers who don't expect to live in the house long might choose a 5/5 ARM and sell the home before the interest rates can rise too high.

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