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What is a 5/1 ARM?
When you buy a home, you choose between two basic types of mortgages: a fixed-rate mortgage or an adjustable-rate mortgage.
A fixed-rate mortgage locks in your interest rate for the entire life of your loan. An adjustable-rate mortgage, often referred to as an ARM, keeps your rate the same for the first few years, then changes it periodically, usually once per year. Your rate could increase or decrease, depending on the economy.
With a 5/1 ARM, your rate stays the same for the first five years, then changes once a year. Many lenders offer other terms, such as 7/1 ARMs and 10/1 ARMs, but a 5/1 term is the most common adjustable-rate mortgage term.
5/1 ARM rates over the last decade
Here are the lowest 5/1 ARM rates each year, from 2011 to 2021:
Comparing today’s 5/1 ARM rates to the lowest rates over the last 10 years could help you determine whether you want to a) get a mortgage soon, and b) choose an ARM.
Is a 5/1 ARM a good deal?
There can be some major advantages to ARMs. Lenders may offer a lower interest rate during the intro rate period (the first five years, for a 5/1 ARM) than they offer for fixed-rate mortgages. The low intro rate makes an ARM a good deal if you plan to move before the intro rate period ends, because you’d pay a lower rate and never risk an increase.
How to get a good mortgage rate
Lenders look at your finances when determining an interest rate. The better your financial situation is, the lower your rate will be.
Lenders consider three main factors: down payment, credit score, and debt-to-income ratio.
Down payment: Depending on which type of mortgage you take out, a lender might require anywhere from 0% to 20% for a down payment. But the more you put toward a down payment, the lower your rate will be. If you can afford more than the minimum down payment, you could snag a better rate.Credit score: Many mortgages require at least a 620 credit score, and an FHA loan lets you get a mortgage with a 580 score. But if your credit score is higher than the minimum, you’ll probably land a better interest rate. To boost your score, try making payments on time, paying down debts, and letting your credit age.Debt-to-income ratio: Your DTI is the amount you pay toward debts each month in relation to your monthly income. Most lenders want to see a minimum DTI of 36%, but you can get a lower mortgage rate with a lower ratio. To decrease your ratio, consider ways to increase your income or pay down debts.
You should be able to get a low mortgage rate with a sizeable down payment, excellent credit score, and low DTI.
How to find personalized 5/1 ARM rates
We’re showing today’s average mortgage rates, but you can find personalized rates based on your down payment amount, credit score, and debt-to-income ratio.
If you’re a little further along in the homebuying process, then you can speak with multiple lenders to receive personalized rates to compare and contrast rates before choosing a lender.
What’s the difference between a mortgage interest rate and APR?
When searching for rates, you’ll probably see two percentages pop up: interest rate percentage and annual percentage rate (APR).
The interest rate is the rate the lender charges you for taking out a mortgage.
The APR takes the rest of your house payments into consideration, such as private mortgage insurance, homeowners insurance, and property taxes.
The APR gives you a better idea of how much you’ll actually pay on your home.