Question 1

What is a 5/1 ARM?

Accepted Answer

A 5/1 ARM is an adjustable rate mortgage with a fixed interest rate for the first 5 years, after which the rate adjusts annually. The initial rate is typically lower than a comparable fixed-rate mortgage, but payments can increase after the fixed period ends.

Question 2

What is the initial payment on a $350,000 ARM?

Accepted Answer

With $70,000 down at 5.500% for the first 5 years, the initial monthly payment is $1,589.81. After the fixed period, the estimated payment adjusts to $1,829.78.

Question 3

What are ARM rate caps?

Accepted Answer

ARM rate caps limit how much your interest rate can increase. There are typically three caps: an initial adjustment cap (how much the rate can change at the first adjustment), a periodic cap (maximum change at each subsequent adjustment), and a lifetime cap (maximum total increase over the life of the loan). For this ARM, the periodic cap is 2.0% and the lifetime cap is 5.0%.

Question 4

What is the worst-case payment on this ARM?

Accepted Answer

If the rate reaches the lifetime cap of 10.500%, the maximum monthly payment would be $2,444.39. This is the highest your payment could ever reach under the terms of this ARM.

Question 5

Should I choose an ARM or fixed-rate mortgage?

Accepted Answer

An ARM may be a good choice if you plan to sell or refinance before the fixed period ends, want to take advantage of lower initial rates, or expect interest rates to decrease. A fixed-rate mortgage is better if you plan to stay long-term and want predictable payments. Consider your risk tolerance and financial plans carefully.

Question 6

How does an ARM compare to a fixed-rate mortgage?

Accepted Answer

For this scenario, the ARM initial payment of $1,589.81 is the same as a fixed rate at 5.500%. However, a fixed-rate at 7.000% would cost $1,862.85/mo from day one, versus the ARM which starts lower but adjusts after 5 years.

ARM Calculator

Enter ARM Loan Details

Your ARM Results

ARM Calculator

ARM Calculator Inputs

Enter ARM Loan Details

Your ARM Results