5-6 Hybrid Adjustable-Rate Mortgage - 5-6 Hybrid ARM

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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. .

INVESTOPEDIA EXPLAINS '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.

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