DEFINITION of '5-6 Hybrid Adjustable-Rate Mortgage - 5-6 Hybrid ARM'

An adjustable-rate mortgage with an initial five year fixed interest rate after which the interest rate begins to adjust every six months according to an index plus a margin (or, the fully indexed interest rate). The index is variable while the margin is fixed for the life of the loan. 5-6 ARMs are usually tied to the six-month London Interbank Offered Rate (LIBOR) index. .

BREAKING DOWN '5-6 Hybrid Adjustable-Rate Mortgage - 5-6 Hybrid ARM'

When shopping for an ARM, the index, the margin and the interest rate cap structure should not be overlooked. In a rising interest rate environment, the longer the time period between interest rate reset dates, the more beneficial it will be for the borrower. So, in this case, a 5-1 ARM would be better than a 5-6 ARM. The opposite would be true in a falling interest rate environment.

Additionally, different indexes behave differently in different interest rate environments. Those with a built-in lag effect, such as the Moving Treasury Average (MTA) Index are more beneficial in a rising interest rate environment than short-term interest rate indexes such as the one-month LIBOR. The interest rate cap structure determines how quickly and to what extent the interest rate can adjust over the life of the mortgage. Different cap structures might be available for certain types of ARMs. Finally, the margin is fixed for the life of the loan, but it can frequently be negotiated with the lender before signing mortgage documents.

RELATED TERMS
  1. Adjustable-Rate Mortgage - ARM

    An adjustable rate mortgage is a type of mortgage in which the ...
  2. Indexed Rate

    An interest rate charged on loans to borrowers that is calculated ...
  3. Indexed ARM

    An adjustable-rate mortgage on which the interest rate adjusts ...
  4. 5-1 Hybrid Adjustable-Rate Mortgage ...

    An adjustable-rate mortgage (ARM) has an initial five-year fixed-interest ...
  5. Discretionary ARM

    An adjustable-rate mortgage on which the lender has the right ...
  6. Mortgage Index

    The benchmark interest rate an adjustable-rate mortgage's fully ...
Related Articles
  1. Personal Finance

    The Best Candidate For an Adjustable Rate Mortgage

    Adjustable-rate mortgages aren't for everyone, but they make sense if you are a short-term homeowner or can pay off the loan before it readjusts.
  2. Personal Finance

    Fixed Or Variable-Rate Mortgage: Which Is Better Right Now?

    Find out the benefits of fixed- and variable-rate mortgages, and learn which option is best for you.
  3. Investing

    Mortgages: Fixed Rate Versus Adjustable Rate

    Choosing the right mortgage can help homebuyers avoid costly mistakes. Learn the difference between fixed- and adjustable-rate loans.
  4. Personal Finance

    Mortgages: Fixed-Rate Versus Adjustable-Rate

    Both of these have advantages and disadvantages depending on your financial needs and prospects.
  5. Personal Finance

    Adjustable-Rate Mortgage Indexes: Know Your Benchmark

    Understanding these benchmarks can help you select the most competitive adjustable-rate loan.
  6. Insights

    How Interest Rates Affect the Housing Market

    Understand how rate changes can affect home prices and learn how you can keep up.
  7. Investing

    Subprime Is Often Subpar

    Proceed with caution when considering these short-term, high-interest mortgages.
  8. Personal Finance

    5 Secrets You Didn't Know About Mortgages

    Being savvy about the ins and outs of mortgages can mean big savings in the long term.
  9. Personal Finance

    5 Risky Mortgage Types To Avoid

    There are plenty of ways to end up with a bad mortgage. The risks of these five should make every homebuyer think twice before signing.
  10. Personal Finance

    Option ARMs: American Dream Or Mortgage Nightmare?

    Option adjustable rate mortgages could make or break your home-buying experience.
RELATED FAQS
  1. What is the difference between a 2/28 and a 3/27 ARM?

    An adjustable rate mortgage (ARM) is a type of mortgage that has a fixed interest rate for a certain time period at the beginning ... Read Answer >>
  2. Which is better, a fixed or variable rate loan?

    Interest on variable interest rate loans vary as market interest rates change. Interest on fixed interest rate loans will ... Read Answer >>
  3. What are the different types of subprime mortgages?

    Clarify your understanding of subprime mortgages. Learn about the different types, how they work and when they might be beneficial. Read Answer >>
Trading Center