As housing price is increasing every year in the US, it is becoming difficult for people to purchase a house with full cash. Here, different loan options can help you purchase your dream house and one of those options is 5/1 ARM loans. It is an Adjustable-Rate Mortgage loan, where the interest rate will be the same for the first five years. After five years, the interest rate will be adjusted depending on various indices such as the Cost of Funds Index, Secured Overnight Financing Rate, and Constant Maturity Treasuries. Usually, a 5/1 ARM loan has a amortization period of 30-years. However, if certain indices are fulfilled, the term period can be shorter than that.
Should You Consider a 5/1 ARM Loan?
Pros of Getting a 5/1 ARM Loan
· Lower Initial Interest Rate
As the interest rate will change after five years, the initial interest rate is comparatively lower for 5/1 ARM loans. The money you will be saving by paying less interest rate can be put into upgrading the home or increasing savings.
Again, this initial lower interest rate will help you save money in the long term. For example, if you put the money you saved by paying a lower interest rate towards the principal, you can pay off your home faster. Because you will be paying less mortgage on a low balance. This is applicable even when the adjustable interest rate is set higher than the initial interest rate.
· Best for Short-Terms
If you don’t like to stay in a house for a long time, 5/1 ARM long is perfect for you. Because as stated above, you will have to pay the minimum interest rate for the first five years. And if you plan properly, you can take advantage of this and change houses every five years.
Cons of Getting 5/1 ARM Loan
· Unpredictable Interest Rate
As it is an Adjustable-Rate Mortgage, the interest rate can increase exponentially after five years. And sometimes, when the interest rate increases like that, it gets difficult for the borrower to pay the interest. And if you don’t pay the interest on time, it will start to affect your credit score. In the worst-case scenario, if you are unable to bear the interest, you will risk losing the house.
· Expensive Refinancing
In the 5/1 ARM Loan, refinancing is a bit expensive and comes with high closing costs.
When Should You Consider the 5/1 ARM Loan?
To decide whether the 5/1 ARM loan is for you or not, you’ll have to determine how long you are going to stay in the house. If you want to stay in the home for a long time and raise a family in the home, a 5/1 ARM loan may not be suitable for you. However, if you plan to change houses every five years, you should consider getting a 5/1 ARM loan.
