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When it comes to mortgages, there is no one-size-fits-all solution. But there are lots of options. And your job as a borrower is to understand all your options. When you apply for financing to buy a home, an adjustable-rate mortgage (ARM loan or ARM) may be one of your options. And a 5/6 ARM is one of the most common adjustable-rate loan options available.
If you’re considering a 5/6 ARM, we’re here to help. Read on to learn what an ARM is and what an adjustable interest rate means for your current and future finances.
What Is an ARM Loan?
An ARM is a mortgage that typically has a fixed interest rate for a set number of years. After that, the mortgage rate changes periodically until the loan is paid off.
ARMs are usually expressed in two numbers. The first number is the number of years you’ll pay the fixed rate (also called the initial fixed-rate period or introductory period). The second number is the adjustment period (or adjustable-rate period). The second number indicates how often your interest rate will adjust after the introductory period.
Banks and other private lenders offer different types of ARMs. You may qualify for a 5/5 ARM, a 7/6 ARM or a 10/6 ARM.
In many cases, a borrower can get a lower introductory interest rate with an ARM than with a fixed-rate mortgage. However, that can change quickly after the introductory period ends.
How Does a 5/6 ARM Work?
A 5/6 ARM is an adjustable-rate mortgage that has a fixed interest rate for 5 years. After that, the rate can change every 6 months. Most 5/6 ARMs have a total loan term (repayment period) of 30 years.
The first 5 years of a 5/6 ARM are predictable. The interest rate is fixed, so every monthly mortgage payment is the same. You can find the fixed rate (the initial interest rate) in your Loan Estimate.
In year 6, things start to get interesting. The interest rate adjusts every 6 months based on two factors: the index rate and the margin.
- The index rate: Is a benchmark interest rate. Your lender will choose a specific market index, such as the U.S. prime rate or the Constant Maturity Treasury (CMT) rate. Your interest rates will usually adjust up or down based on changes in the index.
- The margin: Is the set number of percentage points your lender adds to the index rate. This number is set when you get the Loan Estimate, and it never changes.