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What is a 5/1 ARM?

In commercial real estate lending, a 5/1 ARM (Adjustable Rate Mortgage) is a type of loan where the interest rate is fixed for the first 5 years and then adjusts annually based on market conditions.

The “5/1” in the term refers to the initial fixed-rate period and the frequency of rate adjustments. The first number, “5”, indicates the number of years that the interest rate will be fixed before the rate begins to adjust. The second number, “1”, indicates that the rate will adjust annually after the initial fixed-rate period ends.

During the initial fixed-rate period, the interest rate on a 5/1 ARM is typically lower than that of a traditional fixed-rate loan. This can make the loan more affordable in the short term, which may be attractive to borrowers who plan to sell or refinance the property within the first 5 years of ownership.

However, borrowers should also be aware that once the fixed-rate period ends, the interest rate on a 5/1 ARM can fluctuate based on market conditions, which can result in higher or lower monthly payments. It’s important to carefully consider the risks and benefits of a 5/1 ARM before choosing this type of loan, and to work with a knowledgeable lender who can provide guidance and support throughout the loan process.

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