how a hybrid adjustable rate mortgage such as a 5 1 hybrid arm works
the 5 1 hybrid arm may be the most popular type of adjustable rate mortgage but it s not the only option there are 3 1 7 1 and 10 1 arms as well these loans offer an introductory fixed rate for three seven or 10 years respectively after which they adjust annually 2also known as a five year fixed period arm or a five year arm this mortgage features an interest rate that adjusts according to an index plus a margin hybrid arms are very popular with consumers as they may feature an initial interest rate significantly lower than a traditional fixed rate mortgage most lenders offer at least one version of such hybrid arms of these loans the 5 1 hybrid arm is especially popular other arm structures exist such as the 5 5 and 5 6 arms which also feature a five year introductory period followed by a rate adjustment every five years or every six months respectively notably 15 15 arms adjust once after 15 years and then remain fixed for the remainder of the loan less common are 2 28 and 3 27 arms with the former the fixed interest rate applies for only the first two years followed by 28 years of adjustable rates with the latter the fixed rate is for three years with adjustments in each of the following 27 years some of these loans adjust every six months rather than annually hybrid arms have a fixed interest rate for a set period of years followed by an extended period during which rates are adjustable example of a 5 1 hybrid arminterest rates change based on their marginal rates when arms adjust along with the indexes to which they re tied if a 5 1 hybrid arm has a 3 margin and the index is 3 then it adjusts to 6 but the extent to which the fully indexed interest rate on a 5 1 hybrid arm can adjust is often limited by an interest rate cap structure the fully indexed interest rate can be tied to several different indexes and while this number varies the margin is fixed for the life of the loan 3a borrower can save a significant sum on their monthly payments with a 5 1 hybrid arm assuming a home purchase price of 300 000 with a 20 down payment 60 000 a borrower with very good excellent credit can save 50 to 150 basis points on a loan and more than 100 per month in payments on their 240 000 loan of course that rate could rise so borrowers should anticipate a rise in their monthly payment be prepared to sell their home when their rate goes up or be ready to refinance 