July 30, 2025
8 minutes
When it comes to home loans, one size definitely doesn't fit all. If you're weighing mortgage options, the 5/1 Adjustable-Rate Mortgage (ARM) is a popular choice - but is it right for you? In this guide, we’ll walk through the essentials so you can make a decision that aligns with your goals and your wallet.
Key Takeaways
- Lower Starting Rates: A 5/1 ARM typically features a lower interest rate for the first five years compared to fixed-rate loans.
- Annual Adjustments After 5 Years: The Interest rate adjusts yearly based on market conditions after the fixed period.
- Potential for Savings: Great for those who plan to move, sell, or refinance within five years.
- Understand the Risks: Payments may increase after year five - know your financial flexibility.
- Smart Planning Required: Know the adjustment caps, index, and margin tied to the loan.
If you want lower monthly payments upfront and plan to sell, refinance, or relocate within five years, a 5/1 ARM could save you serious cash. But it’s not without risk - your rate can change after the fifth year.
Get Pre-Qualified and Save Up to 1.5% at Closing with reAlpha
Save up to 1.5% at closing when you combine real estate and mortgage services with reAlpha.
What is a 5/1 ARM?
A 5/1 ARM is a mortgage with a fixed interest rate for the first five years. After that, the rate adjusts once per year based on a market index (such as the Secured Overnight Financing Rate, or SOFR) plus a set margin.
Here's how it works:
- Years 1–5: Fixed interest rate, often lower than traditional 30-year fixed rates.
- Year 6 and beyond: Rate adjusts annually, and monthly payments may increase.
- Adjustment Caps: Limits on how much your rate can increase annually and over the life of the loan.
Pro Tip: Always check your loan's lifetime cap - it can help you plan for the worst-case scenario.
Who Might Benefit from a 5/1 ARM?
This loan isn't one-size-fits-all, but it’s ideal for:
- Relocators or Career Movers: Planning to move in under five years? You may never reach the adjustment period.
- Future Refinancers: Expecting to refi before year five? A 5/1 ARM could offer interim savings.
- Financially Strategic Buyers: If you’re confident in your income growth, this option provides initial breathing room.
Risks of a 5/1 ARM
We wouldn’t be doing our job if we didn’t highlight the cons:
- Rate Shock: Monthly payments may increase after five years, potentially by hundreds of dollars.
- Budgeting Complexity: Makes long-term financial planning trickier.
- Market Dependence: You're at the mercy of future economic conditions.
Heads up: If market rates spike, your new payment could surprise you. Know your adjustment caps, and factor them into your decision.
How to Decide if a 5/1 ARM is Right for You?
Here’s a framework to evaluate:
- How long do you plan to stay in the home?
- Can your income support potential payment increases?
- Are you comfortable with some uncertainty?
If you answered yes to all three, the 5/1 ARM could be a smart move.
Compliance & Important Disclosures
- Interest rate and APR examples are for illustrative purposes only. Actual rates will vary.
- This article is for educational purposes and should not be considered financial advice.
- reAlpha Mortgage is a licensed mortgage lender, NMLS ID #1743790.
- All loans are subject to underwriting approval. Terms and conditions apply.
- Loan features and benefits may vary by state and individual borrower qualification.
For verified rate info, visit the Consumer Financial Protection Bureau.
Buying a Home? Get up to 1.5% Cash Back at Closing
Get pre-approval first, then start exploring homes knowing you can receive up to 1.5% of the home price back at closing.
Conclusion: Explore Smarter Mortgage Options
Buying your dream home doesn’t have to break the bank. With reAlpha Mortgage, you could save thousands at closing - thanks to our industry-first rebate offer.
Here’s how it works: Earn a portion of your agent’s commission back when you work with a reAlpha agent. Increase your savings by bundling your loan with reAlpha, and maximize your rebate by adding title services-real cash you can use for inspections, repairs, or furnishing your new home.
It’s simple, smart, and built for buyers like you. Ready to maximize your savings? Start with reAlpha Mortgage.
Estimate your savings → Rebate Calculator
FAQs
What does the 5/1 in 5/1 ARM mean?
"5" stands for the number of years the rate is fixed. "1" means it adjusts annually after that.
Can I refinance before the rate adjusts?
Yes. Many borrowers refinance within the fixed period to avoid potential rate hikes.
Are ARM rates always lower at first?
Typically, yes. That’s what makes ARMs appealing for short-term plans.
Is a 5/1 ARM risky?
There is risk if rates rise significantly. But with careful budgeting and timing, that risk can be managed.
Can first-time homebuyers use a 5/1 ARM?
Absolutely. Just be sure to understand how future payment changes might impact your budget.
Want to talk strategy with a licensed lender? Visit reAlpha Mortgage, NMLS ID #1743790.
Get the latest market trends, homebuying tips, and insider updates—straight to your inbox. No fluff, just the good stuff.
Article by
Rocky Billore is a mortgage industry leader and Chief Sales Officer with over two decades of experience across residential and commercial lending. Since entering the industry in 2004, he has been directly involved in funding more than $1.4 billion in loans. A recognized expert in VA and government lending, Rocky combines deep program knowledge with a data driven, relationship-first leadership style. His work focuses on building scalable sales organizations, developing high performing teams, and aligning technology with real world lending outcomes to improve the homeownership experience.