5-Year ARM Mortgage of July 2024

Secure a 5-year ARM mortgage with competitive rates and flexible terms online from one of the companies vetted by our experts. As of 24.07.2024, you have 1 options available. Boost your chances of approval by completing an application with a free credit score check.
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Updated:
23.06.2024
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A 5-year adjustable-rate mortgage (ARM) offers an introductory period of five years with a fixed interest rate, often referred to as a "teaser" rate, which is typically lower than the rates on fixed-rate mortgages. After this initial period, the interest rate becomes adjustable and can change every six months based on economic conditions and market variables. The adjustments are determined by adding an index, which fluctuates, to a margin, which remains constant. This combination determines the actual interest rate you pay once the fixed-rate period ends.

The 5-year ARM is a type of hybrid mortgage, blending a fixed-rate period with an adjustable-rate period. After the first five years, the interest rate can adjust based on preset caps. These caps often come in a format like 2/1/5, indicating the limits on how much the rate can change initially, at each subsequent adjustment, and over the loan's lifetime. For instance, an initial cap of 2% means the rate can't increase by more than two percentage points at the first adjustment. Similarly, a subsequent cap of 1% limits rate changes in later adjustments, and a lifetime cap of 5% sets the maximum increase over the loan term.

Features

  1. Introductory Rate Period. The initial five years of a 5-year ARM feature a fixed "teaser" interest rate, which is typically lower than prevailing rates on fixed-rate mortgages. This can make early monthly payments more affordable.

  2. Adjustment Frequency. After the first five years, the interest rate adjusts every six months. This adjustment is based on an index plus a fixed margin, reflecting current market conditions.

  3. Interest Rate Caps. Caps are in place to limit how much the interest rate can change. The initial cap restricts the first adjustment, the periodic cap limits subsequent adjustments, and the lifetime cap sets the maximum possible rate increase over the loan's term.

  4. Margin and Index. The loan's interest rate consists of a fixed margin and a variable index. While the margin remains constant, the index can fluctuate, impacting the overall interest rate.

  5. Hybrid Nature. Combines a fixed-rate period with a subsequent adjustable-rate period, offering a mix of stability and flexibility. The fixed period allows for planning, while the adjustable period adapts to market conditions.

Pros and Cons

Pros

Tax Benefits. Mortgage interest and property taxes may be tax-deductible, providing potential savings for homeowners on their annual tax returns.

Goldilocks Period. Offers a balance between a shorter 3-year ARM and a longer 7- or 10-year ARM, providing a moderate fixed-rate period before adjustments begin.

Equity Building. As borrowers make monthly payments, they build equity in their homes, which can be a valuable financial asset and can potentially be used for other financial needs through home equity loans or lines of credit.

Cons

Short Introductory Period. The fixed-rate lasts only five years, after which the rate adjusts, creating uncertainty and the potential for higher payments.

Adjustment Risk. The adjustable period extends for up to 25 years, bringing considerable risk as rates can increase, leading to higher monthly payments.

Costly Exit. If refinancing becomes necessary to manage higher payments after the fixed period, closing costs for refinancing can be substantial, ranging from 2% to 5% of the loan balance.

How to Get an ARM with a 5-Year Term

Apply for a loan

  1. Assess Your Financial Health. Obtain a copy of your credit report and check your credit score. Most mortgage lenders require a minimum credit score for approval. Calculate your DTI by dividing your monthly debt payments by your gross monthly income. Lenders typically prefer a DTI of 43% or lower. Aim to save at least 20% of the home's purchase price to avoid private mortgage insurance (PMI), though some lenders offer options with lower down payments.

  2. Determine Your Budget. Use a mortgage calculator to estimate your monthly mortgage payment based on various loan amounts, interest rates, and down payment sizes. Factor in property taxes, homeowners insurance, mortgage insurance, and potential homeowners association (HOA) fees.

  3. Get Pre-Approved. Research mortgage lenders, including banks, credit unions, and mortgage brokers, to find one that offers favorable terms and rates. Provide necessary documentation, such as proof of income, tax returns, and bank statements, to the lender for pre-approval. A pre-approval letter indicates the loan amount you qualify for, which can strengthen your offer when buying a home.

  4. Shop for a Mortgage. Obtain quotes from multiple lenders to compare interest rates, loan terms, and fees. Adjustable-rate mortgages (ARMs) have variable rates that may start lower but can increase over time. The APR includes the interest rate and additional fees, providing a more comprehensive view of the loan's cost.

  5. Choose Your Mortgage. Consider the interest rate, loan term, monthly payment, and any additional costs or fees when choosing the best mortgage offer. Once you’ve chosen a mortgage, you may have the option to lock in the interest rate to protect against rate increases before closing.

  6. Complete the Application. Provide detailed information about your financial situation, employment, and the property you wish to purchase. Some lenders charge fees to process your application.

  7. Go Through the Underwriting Process. Be prepared to submit further documentation as requested by the lender during underwriting. The lender will order an appraisal to ensure the property’s value supports the loan amount. A title company will verify the property’s title to ensure there are no legal issues.

  8. Close on Your Mortgage. This document outlines the final terms of your loan, including the loan amount, interest rate, monthly payments, and closing costs. Review it carefully. Sign the necessary documents to finalize the loan. Bring a cashier's check or arrange a wire transfer for your down payment and closing costs. Once all documents are signed and funds are transferred, you’ll receive the keys to your new home.

Requirements

  1. Credit Score. A minimum score of 620 for conventional loans. Higher scores may be required for better rates or specific lenders.

  2. Down Payment. Typically 5% to 20% of the home’s purchase price, depending on lender policies and borrower’s credit profile.

  3. Debt-to-Income Ratio (DTI). Generally, lenders prefer a DTI of 36% or lower. Some lenders may accept up to 43%, especially with compensating factors.

  4. Income Verification. Proof of stable and sufficient income through pay stubs, tax returns, and bank statements.

  5. Employment History. At least two years of steady employment, preferably in the same field.

  6. Savings/Reserves. Proof of adequate savings or reserves, often required to cover a few months of mortgage payments.

  7. Property Appraisal. The home must be appraised to verify its value meets or exceeds the purchase price or loan amount.

  8. Other Documentation. Government-issued ID, Social Security number, and authorization for credit checks. Documentation of other assets and liabilities.

Conditions

  1. Introductory Rate. Fixed interest rates for the initial five years, often significantly lower than fixed-rate mortgage rates. Example: 3.5% for the first five years.

  2. Adjustment Frequency. After the initial fixed period, the interest rate adjusts every six months based on the index plus a fixed margin.

  3. Interest Rate Caps. The initial cap is typically, the first adjustment that can increase the rate by up to 2 percentage points. Each subsequent adjustment can increase the rate by up to 1 percentage point. The interest rate can increase by no more than 5 percentage points over the life of the loan.

  4. Margin. A fixed amount is added to the index rate to determine the new rate at each adjustment. Example: 2.5%.

  5. Index. The variable part of the interest rate, can be tied to indices like the LIBOR, SOFR, or Treasury rates.

  6. Loan Term. Typically a 30-year loan term, with the first 5 years at a fixed rate and the remaining 25 years adjustable.

  7. Teaser Rates. The introductory rate (teaser rate) is set lower to attract borrowers during the fixed-rate period.

  8. Down Payment. Lenders may require down payments as low as 3% for conventional loans, while borrowers aiming to avoid private mortgage insurance (PMI) may opt for down payments of 20% or more.

  9. Loan Amounts. Lenders may offer mortgage loans ranging from $100,000 to $1,000,000 or more, depending on the borrower's financial profile and the property's value.

Ways to Get the Money

  1. Certified Check. Some borrowers may choose to receive mortgage funds in the form of a certified check issued by the lender or closing agent. This method provides a physical form of payment that can be deposited into the borrower's bank account.

  2. Escrow Disbursement. In some cases, mortgage funds are held in an escrow account and disbursed to the appropriate parties at closing. This method ensures that all closing costs and fees are paid before releasing the remaining funds to the borrower.

  3. Direct Deposit. Certain lenders offer the option for mortgage funds to be directly deposited into the borrower's bank account on the day of closing. This electronic transfer provides immediate access to the loan proceeds without the need for physical checks or wire transfers.

Best Places to Get an ARM with 5-Year Term

NBKC is an attractive choice for borrowers seeking low rates and fees coupled with an online experience supported by phone assistance. Known for emphasizing VA loans, NBKC stands out with its range of government-backed options and specialty products like construction loans and mortgages for pilots. According to recent federal data, NBKC offers lower rates and fees than many competitors and provides customized rate and fee estimates without requiring contact information.

Guaranteed Rate caters to borrowers looking for a diverse array of loan options, including jumbo, interest-only, renovation loans, and government-backed mortgages. It boasts a quick one-day mortgage approval process and a wide selection of loans, such as ITIN and home equity lines of credit that can be funded in as few as five days. This lender's broad loan menu makes it appealing to those seeking comprehensive financing solutions.

PNC is well-suited for borrowers with low to moderate incomes, limited down payments, or those purchasing homes in high-priced areas. The bank offers a variety of low-down-payment loans, including FHA, VA, USDA, and the PNC Community Loan. PNC also receives high customer satisfaction ratings from J.D. Power and Zillow, and its mortgage rates are consistently lower than industry averages, making it a strong contender for affordable home financing.

Truist appeals to first-time and low-income home buyers, early-career doctors, and those looking for low-down-payment mortgages, particularly in states like South Carolina, North Carolina, Texas, and Virginia. Truist provides a wide range of loan options, including construction loans, programs for early career doctors, jumbo loans, and home equity lines of credit. Its proprietary grant program helps borrowers with down payment and closing costs, and the bank's mortgage rates are typically below industry averages, enhancing its attractiveness.

Things to Pay Attention To

  1. Interest Rate and APR. Compare both the interest rate and the annual percentage rate (APR) to understand the total cost of the loan, including fees and other charges.

  2. Loan Term. Consider the length of the loan term and how it affects your monthly payments and total interest paid over time.

  3. Type of Mortgage. Determine whether a fixed-rate or adjustable-rate mortgage (ARM) is more suitable for your financial situation and long-term goals.

  4. Down Payment Requirements. Understand the minimum down payment required by the lender and consider how it impacts your upfront costs and monthly payments.

  5. Closing Costs. Review the breakdown of closing costs, including appraisal fees, title insurance, and origination fees, and ensure they align with your budget.

  6. Prepayment Penalties. Check if the mortgage includes penalties for paying off the loan early and consider whether this aligns with your plans for the property.

  7. Private Mortgage Insurance (PMI). Understand if PMI is required for your loan and how it affects your monthly payments, especially if you're making a down payment of less than 20%.

How to Repay an ARM with a 5-Year Term?

  1. Understand Your Mortgage Terms. Familiarize yourself with the terms of your mortgage, including the interest rate, loan amount, loan term, and any prepayment penalties or other fees. Determine the frequency of mortgage payments (e.g., monthly, bi-weekly) and the due date for each payment.

  2. Set Up a Payment Method. Consider setting up automatic payments through your bank or mortgage servicer to ensure timely payment each month. Explore online payment options provided by your lender or servicer for convenience and ease of use. If preferred, you can also mail payments to the address provided by your lender, ensuring they are received by the due date.

  3. Consider Additional Payments. Determine if you can make extra payments towards your mortgage principal to pay down the loan faster and save on interest. Explore the option of making bi-weekly payments instead of monthly payments to accelerate the repayment schedule.

  4. Communicate with Your Lender. Keep your lender informed of any changes to your financial situation that may impact your ability to make mortgage payments. If you encounter financial hardship, such as job loss or medical expenses, contact your lender to discuss potential options for assistance or loan modification.

Reasons for Getting Rejected for an ARM with 5-Year Term

  1. Low Credit Score. A history of late payments, defaults, or high levels of debt can lower your credit score, making you a higher risk for lenders. Multiple recent credit inquiries or applications for new credit may signal financial instability to lenders.

  2. High Debt-to-Income Ratio (DTI). Lenders assess your DTI ratio, which compares your monthly debt payments to your gross monthly income. A high DTI ratio may indicate that you are overleveraged and unable to afford additional debt.

  3. Insufficient Income. Lenders require proof of stable income to ensure you can afford mortgage payments. Inconsistent or insufficient income documentation may result in rejection. A short or unstable employment history can raise concerns about your ability to maintain a steady income for mortgage payments.

  4. Inadequate Down Payment. Lenders typically require a minimum down payment, often around 20% of the home's purchase price. A smaller down payment may result in higher risk for the lender and increase the likelihood of rejection.

  5. Poor Property Appraisal. If the appraised value of the property is lower than the purchase price or loan amount, lenders may hesitate to approve the mortgage due to concerns about the property's value as collateral.

  6. Unstable Financial History. Past bankruptcies, foreclosures, or other negative financial events may raise red flags for lenders and result in mortgage rejection. Outstanding collections accounts, tax liens, or other financial judgments can signal financial instability and impact your ability to qualify for a mortgage.

Alternatives

  1. A personal loan is an unsecured loan that can be used for various purposes, including home renovations or purchases. Personal loans typically have fixed interest rates and repayment terms, providing predictability for borrowers. While not secured by the property, personal loans may have higher interest rates compared to mortgages.

  2. With a lease-to-own agreement, you rent a home with the option to purchase it at a later date. A portion of your monthly rent payments may go toward the purchase price, providing an opportunity to build equity over time without committing to a mortgage upfront.

  3. Some retirement plans, such as 401(k)s, allow participants to borrow against their account balance for various purposes, including home purchases or renovations. 401(k) loans typically have lower interest rates compared to other credit products and may not require a credit check. Borrowers must repay the loan according to the plan's terms or face penalties and taxes.

  4. A bridge loan is a short-term loan used to bridge the gap between the purchase of a new home and the sale of an existing property. Higher interest rates and fees compared to traditional mortgages, typically repaid within a few months to a year and secured by the borrower's existing home. Provides temporary financing for homebuyers facing timing challenges, such as contingent offers or overlapping mortgage payments.

Editorial Opinion

A 5-year term ARM offers a compelling option for homebuyers looking to benefit from a lower initial interest rate during the initial rate period, which typically spans the first five years. This introductory phase often features a "teaser" rate that is significantly lower than what fixed-rate loan products offer, providing immediate cost savings on purchase loans. However, once the fixed rate period ends, the interest rate becomes adjustable, fluctuating based on economic conditions and benchmarks such as the secured overnight financing rate. While this can lead to potential savings if rates fall, it also introduces uncertainty and the risk of higher payments in the future, making it essential for borrowers to carefully consider their long-term financial stability and the potential need to refinance or sell their home before the adjustment period begins.

Important

Keeping your Debt-to-Income (DTI) ratio below 30-40% of your monthly income is crucial. This will help you avoid potential financial problems in the future. Additionally, always assess the necessity and feasibility of taking a loan, ensuring you can comfortably manage its repayment.

How to Choose a Mortage Lender

  1. Check Associations. Look for lenders who are members of reputable organizations, such as the Mortgage Bankers Association (MBA). Membership in these organizations can indicate a higher level of reliability and professionalism.

  2. Review Terms and Conditions. Carefully examine all the terms and conditions of the mortgage contract. Pay special attention to details like the loan term, fixed vs. variable interest rates, and any prepayment penalties.

  3. Interest Rates and Costs. Scrutinize the interest rates and ensure that your contract includes a detailed breakdown of the total cost of the mortgage, including closing costs, origination fees, and any other charges.

  4. Right of Rescission. Remember you can utilize your right of rescission, which typically allows you to cancel the mortgage within three days after signing the agreement. Additionally, use the "cooling-off" period to thoroughly review the contract and make an informed decision before finalizing the mortgage agreement.

  5. Compare Offers. Shop around and compare offers from multiple lenders to find the best rates and terms that suit your financial situation.

Additional resources

FAQ

What is an example of a mortgage?

An example of a mortgage is when a prospective homebuyer applies for a loan from a financial institution to purchase a house. Suppose the buyer qualifies for a 30-year fixed rate mortgage of 4% with a $300,000 mortgage amount. In this scenario, the buyer agrees to make monthly payments over the next 30 years to repay the loan, consisting of both principal and interest. The property itself serves as collateral for the loan, meaning that if the borrower fails to make payments as agreed, the lender has the right to foreclose on the property to recover the outstanding debt.

What is the difference between a loan and a mortgage?

A loan, on the other hand, is a sum of money that a financial institution or other lender provides to an individual or organization with the expectation that the borrower will repay the loan amount plus interest over time. Unlike a mortgage, which is specifically used to purchase a home and is secured by the property itself, a loan can be used for various purposes, such as funding education, starting a business, or making large purchases. Loans come in different forms, including personal loans, auto loans, student loans, and business loans, each with its own terms and conditions. While a mortgage is a type of loan, not all loans are mortgages.

Does the mortgage require a down payment?

Typically, yes, a down payment is required for a mortgage loan. Most lenders require borrowers to make a down payment when purchasing a home, with the down payment amount typically expressed as a percentage of the home's purchase price. The down payment serves as an initial equity in the property and reduces the lender's risk by lowering the loan-to-value (LTV) ratio. While the specific down payment requirement can vary depending on factors such as the type of mortgage, the borrower's creditworthiness, and the lender's policies, a down payment of at least 20% of the purchase price is often recommended to avoid the need for private mortgage insurance (PMI) and secure more favorable loan terms. However, there are some mortgage programs available that offer low or no down payment options for eligible borrowers, such as VA loans and USDA loans for military veterans and rural homebuyers, respectively.