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

Is a 5/1 ARM the Right Loan for You?

The homebuying process involves a lot of considerations, especially when deciding how much home you can afford and what type of mortgage you should apply for. Many borrowers choose between a loan with a fixed rate or an adjustable rate. For some homebuyers, an adjustable-rate mortgage offers the opportunity to take advantage of lower interest rates—at least for a while—and save some money.

There are several kinds of adjustable-rate mortgages (ARMs), including 5/1 ARMs. To determine if a 5/1 ARM fits your needs and goals, let’s discuss how they work and their potential advantages and disadvantages.

What Is a 5/1 ARM Loan?

A 5/1 ARM, sometimes called a 5/1 hybrid ARM, is a type of mortgage that blends features of both fixed-rate and adjustable-rate loans. 5/1 ARMs offer a fixed interest rate for the first five years of the loan term. But beginning in year 6, there will be annual rate adjustments for the rest of the term. With these adjustments, your monthly mortgage payment may increase or decrease with changes in the interest rate.

5/1 ARMs usually come with an initial interest rate that’s lower than what fixed-rate mortgages and some other types of ARMs offer, since a shorter fixed period means less risk for the lender. However, the interest rate after year 5 may be higher.

How Does a 5/1 ARM Work?

There are several types of ARMs, all classified by two numbers, like 5/1, to show the length of the fixed-rate period and the frequency of rate changes. You can use this information to better understand when your payments might change and how that could impact your budget.

• Fixed period: The "5" in 5/1 ARM indicates the loan has a fixed interest rate for the first five years. During this time, you’ll have predictable monthly payments.
• Adjustable period: The "1" in 5/1 ARM indicates how the interest rate adjusts once a year after the initial fixed period. Each new rate is determined by adding your lender’s fixed margin to the market index your loan is tied to, like the U.S. prime rate or the 11th District Cost of Funds Index (COFI). You can review your loan documents to see which index your lender uses.

It might feel different taking on a loan with a payment that could change every year. However, there are rate caps that help protect borrowers by placing limits on how much your rate can change. These caps are represented as a series of three numbers, such as 2/3/5.

So, if you get a 5/1 ARM with 2/3/5 rate caps, the “2” represents the initial adjustment cap, which limits the first rate increase at year 6 to a maximum of 2%. The “3” represents the periodic or subsequent adjustment cap, which limits how much the rate can change each year after that. And the second “5” represents the lifetime adjustment cap, which limits how much the rate can rise over the life of the loan.

Example of a 5/1 ARM

Here’s an example of what a 5/1 ARM might look like:

Say you decide to buy a home using a 5/1 ARM for a 30-year term. The loan is for $325,000 with an initial interest rate of 5.75%, tied to the COFI. The loan comes with an initial adjustment cap of 2%, a periodic cap of 3%, and a lifetime cap of 5% (2/3/5).

Here’s how your monthly principal and interest payments might look if rates rise after the 5-year fixed period:

• Years 1–5: $1,897 (initial fixed payment)
• Years 6+: $2,277 (possible new payment at the first allowed increase)
• Maximum (lifetime cap): $3,064 (highest possible payment if rates hit the lifetime cap)

Rate caps don’t just limit increases—they also limit how much your rate can go down. So, in this example, your monthly payment could decrease if interest rates fall, but no more than the 2/3/5 caps.

When Is a 5/1 Adjustable-Rate Mortgage a Good Fit?

Because your mortgage will likely be one of your biggest monthly expenses, weighing the pros and cons of a 5/1 ARM will help you make the best decision about whether to pursue one.

Pros of a 5/1 ARM

Some potential advantages of 5/1 adjustable-rate mortgages include:

• Lower payments in the beginning: The fixed rate for the first five years of a 5/1 ARM is typically lower than what other types of mortgages offer, resulting in lower monthly payments.
• Benefits for short-term homeowners: If you plan to refinance your mortgage or sell your home before the five-year fixed period ends, you can still take advantage of the lower initial rate.
• Potential for savings down the road: Interest rates don’t always increase; sometimes, they go down or stay the same. If they decrease after the fixed period, your mortgage payments will likely be lower.

Cons of a 5/1 ARM

Possible drawbacks of 5/1 ARMs worth considering include:

• Risk of increasing rates: After the fixed period, your interest rate and monthly payments could increase substantially.
• More expensive overall costs: You could end up paying more over the loan’s term if interest rates continue to increase. This would result in paying more in total than you would with a fixed-rate mortgage.
• Refinancing risk: Even if you plan to refinance before the fixed period ends, there’s no guarantee it’ll be advantageous, especially if rates, home values, or your credit and income situation have changed for the worse.

Requirements for a 5/1 ARM

If you think a 5/1 ARM is the right type of mortgage for you, there are some requirements and other considerations to keep in mind:

• Loan type: Not all types of mortgages can be 5/1 ARMs, and those that can have their own specific requirements to meet.
• Credit score and income: Lenders have varying credit score and income requirements, all designed to ensure you can handle the mortgage payments—even if they increase with a rate hike. At Freedom Mortgage, we typically look for a score of 620 or higher for conventional loans, and at least a 550 score for FHA loans.
• Down payment: Depending on what kind of loan you get, a down payment of at least 3.5%–5% of the purchase price will likely be necessary. If you’re able and would like to lower your monthly payment, you can also make a larger down payment than the required amount.
• Debt-to-income ratio (DTI): DTI requirements vary, but lenders typically prefer a ratio of 43% or less.

Alternatives to 5/1 ARMs

Whether a 5/1 ARM is the best mortgage for you will depend on your budget, goals, and the length of time you plan to stay in the home. There are other mortgage options that could be a better fit.

Other types of adjustable-rate mortgages, such as 7/1 ARMs and 10/1 ARMs, offer longer fixed periods, which may be a better match for your timeline and situation.

You could also opt for a fixed-rate mortgage and enjoy more predictable payments for the life of the loan. A 30-year fixed-rate mortgage might be the right choice for you if you’re planning to be in the home for a significant amount of time and want more predictable payments. A 15-year fixed-rate loan can offer lower interest rates but comes with a higher monthly payment.

5/1 ARM FAQs

Still have questions about 5/1 ARMs? Here are answers to help you better understand these mortgages.

Is a 5/1 ARM a 30-Year Mortgage?

The majority, thought not all, of adjustable-rate mortgages are 30-year loans. With a 5/1 ARM, you’d have a fixed rate for the first five years, and an adjustable rate for the remaining 25 years of the loan term, unless you sell or refinance before then.

Can You Refinance out of a 5/1 ARM?

Yes, you can typically refinance out of a 5/1 ARM at any time, just like with most other mortgages, as long as your financial situation meets your lender’s requirements. Many borrowers choose to refinance into a fixed-rate loan to lock in a relatively stable payment before the adjustable period begins.

Is It a Good Idea to Use a 5/1 ARM?

A 5/1 ARM can be a smart choice if you plan to sell or refinance before the fixed period ends, since you’ll benefit from a lower initial rate. It might also be a good idea if your income is expected to increase, making the potential for higher rates a less significant concern.

If you want long-term stability and more predictable payments, however, a fixed-rate loan might be a better choice.

Final Thoughts: 5/1 Adjustable-Rate Mortgages

A 5/1 ARM is a unique type of loan that may be a good fit if you’re confident in your financial situation and comfortable with the potential risk of adjustable rates. And if you plan to sell or refinance your home before the fixed period ends, the lower initial interest rate of a 5/1 ARM could save you money during the first five years.

Whether your homebuying goals align with a 5/1 ARM or you’re more drawn to the stability that comes with fixed-rate mortgages, Freedom Mortgage is here to help you find the best loan for your situation. Ready to get started?

By Victoria Araj; Published on October 14th, 2025

Victoria Araj is the Senior Director, Managing Editor at Freedom Mortgage. She holds a bachelor’s degree in journalism with an emphasis in political science from Michigan State University, and a master’s degree in public administration from the University of Michigan.