5-1 Hybrid Adjustable-Rate Mortgage - 5-1 Hybrid ARM

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DEFINITION of '5-1 Hybrid Adjustable-Rate Mortgage - 5-1 Hybrid ARM'

An adjustable-rate mortgage (ARM) with an initial five-year fixed-interest rate. After this initial five-year period, the interest rate begins to adjust on an annual basis according to an index plus a margin (or, the fully indexed interest rate). The speed and the extent to which the fully indexed interest rate can adjust are usually limited by an interest rate cap structure. There are several different indexes that the fully indexed interest rate might be tied to. While the index is variable, the margin is fixed for the life of the loan.

Also known as a "five-year fixed-period ARM".

BREAKING DOWN '5-1 Hybrid Adjustable-Rate Mortgage - 5-1 Hybrid ARM'

There is little probability that the fully indexed interest rate might be lower than the initial fixed interest rate on a 5-1 ARM. The more likely scenario is that the fully interest rate will be higher, leading to an increase in the monthly payment amount beginning in year six.

Depending on the slope of the yield curve, a 5-1 ARM can have an interest rate advantage over a 30-year fixed-rate mortgage. Most borrowers who choose a 5-1 ARM intend to refinance or move before the expiration of the fixed interest rate period. There is some risk in this scenario, because personal finances or general market conditions might make moving or refinancing difficult, or even impossible, five years in the future.

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