When you get a 5/1 ARM refinance, you have a fixed interest rate for five years, which adjusts annually once that period ends. (Shutterstock) Mortgage refinancing options can be confusing, especially when you compare fixed-rate and adjustable-rate loans. While you may think of a mortgage refinance as a fixed-rate loan, it is possible to refinance a fixed- or adjustable-rate mortgage into a new ARM. A 5/1 ARM refinance may make sense for you, depending on your individual circumstances. Here’s what you need to know about 5/1 ARM refinance loans. If you’re considering refinancing your mortgage, it’s a good idea to compare rates from multiple lenders. With Credible, you can see personalized rates in minutes. A 5/1 ARM is a type of adjustable-rate mortgage that’s a hybrid of a fixed-rate loan and a variable-rate loan. The first number represents the number of years your loan has a fixed rate. The second number specifies how often your rate can adjust after the end of the fixed-rate period. For a 5/1 ARM, that’s once per year. It’s common to see ARM loans labeled 3/1, 5/1, 7/1 and 10/1, although 5/1 is the most popular. A 5/1 ARM refinance is a variable-rate loan that you can take out to pay off and replace your current mortgage. You can choose to refinance with an ARM regardless of whether your original mortgage was a fixed-rate loan or another ARM. A 5/1 ARM refinance loan works the same as an ARM you take out to purchase a house. At the end of the initial five-year fixed-rate term, your loan’s interest rate will reset. After that, your interest rate — and monthly payments — can change once a year based on an index the lender uses. If interest rates go up, you’ll end up with a higher monthly payment. If interest rates go down, you could pay less although it’s not likely to be a big decrease. To understand how a 5/1 ARM refinance loan works, you need to know a few terms: The main difference between ARM refinance loans and fixed-rate refinance loans is that with an ARM, your rate is only temporarily fixed. With a 5/1 ARM, your rate is fixed for the first five years. After that, your rate adjusts every year. On the other hand, with a 30-year fixed-rate refinance loan, your rate is fixed over the life of your loan and never fluctuates. Most ARMs have rate caps that limit how much a rate can change after your temporary fixed-rate period ends. One common cap structure is the 2/2/5 cap. Credible makes it easy to compare mortgage refinance rates from multiple lenders, without affecting your credit. In some situations, it can make sense to refinance into an ARM rather than a fixed-rate loan, including: A lower interest rate may also allow you to pay down your mortgage sooner and build equity in your home faster. If you’re close to retiring, you may consider refinancing your mortgage to lower your interest rate and save money each month. But if you plan to stay in your home long-term, know you won’t be able to pay off the loan before it resets, or aren’t sure you’ll be able to refinance again, a 5/1 ARM refinance may not be right for you. As with any refinancing option, you need to consider the pros and cons of a 5/1 ARM: Requirements for a 5/1 ARM refinance loan are much the same as for fixed-rate loans. To get the lowest rate, you’ll likely need a minimum credit score of 620. But because an ARM has a lower monthly payment in the first five years, it can be easier to qualify based on your credit. Lenders look at your employment history, prior years’ taxes, and income. Many lenders want to see that your monthly payment doesn’t exceed 28% of your gross income. Because it’s a refinance, you’ll also need sufficient equity built up in your home, ideally 20% minimum. If you have less equity than that, you’ll have to pay private mortgage insurance (PMI) until you reach that point. Credible makes it easy to compare mortgage refinance offers from multiple lenders. Read on for the answers to a few common questions about 5/1 ARM refinance loans. Like any refinance loan, you’ll want to consider the interest rate, especially the rate you’ll pay in the first five years of your 5/1 ARM. Also look at rate caps and margins set by your lender. Some ARMs come with prepayment penalties and other fees when you refinance your loan. Fees vary, so consider how much you’ll end up paying upfront or rolling into your loan in closing costs. You’ll receive notice from your lender before an interest rate increase on your 5/1 ARM. When you receive this notice, you can choose to refinance to another ARM or to a fixed-rate mortgage. If you plan to stay in your home for many years, a fixed-rate mortgage might be the best choice. But if you plan to move within the fixed-rate period of your ARM, then refinancing to another ARM may be preferable. Remember, your payment will likely change after the fixed-rate period ends, and lenders charge closing costs when you refinance your mortgage, so consider your budget when making this decision. With an interest-only 5/1 ARM, none of the payments you make each month during a certain period go toward paying down the principal balance. The interest-only period varies, but might last from several months to many years. After this interest-only period, your mortgage will amortize so it's paid off by the end of your term. Source: Read Full ArticleWhat’s a 5/1 ARM refinance loan?
How does a 5/1 ARM refinance loan work?
5/1 ARM refinance loans vs. fixed-rate refinance loans
Is there a rate cap for 5/1 ARM refinance loans?
Should you get a 5/1 ARM refinance loan?
5/1 ARM refinance loan pros and cons
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What are the eligibility requirements for 5/1 ARM refinance loans?
5/1 ARM refinance loan FAQs
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What should you do if your interest rate increases?
What’s a 5/1 ARM interest-only loan?