A 5/1 adjustable-rate mortgage (ARM) is a type of home loan with an interest rate that can change after an initial fixed period. The ‘5’ represents the number of years the loan has a fixed rate, and the ‘1’ indicates how often the rate adjusts after that period (in this case, annually).

This financial product starts with an introductory interest rate that is typically lower than the rate for fixed-rate mortgages. This can be an attractive option for borrowers who plan to sell or refinance their home before the rate adjusts or those who anticipate a future income increase to afford higher payments.

After five years, the interest rate will change based on a specific index value plus a set margin. The new rate can go up or down each year but usually has caps that limit how much it can change in a single adjustment period and over the life of the loan. This means while there’s potential for savings if rates decrease, there’s also risk involved if rates go up substantially.

Choosing a 5/1 ARM can be advantageous for certain homeowners, but it’s crucial to understand how rising rates might increase your future monthly payments. It’s important for borrowers to consider their long-term financial stability and tolerance for risk when deciding if a 5/1 ARM is suitable for their needs.