Unlocking the Benefits of 5/6 Hybrid Adjustable-Rate Mortgage (ARM): How It Works and What to Expect

Julia Kagan is a seasoned financial journalist and former senior editor specializing in personal finance at Investopedia.

What Is a 5/6 Hybrid Adjustable-Rate Mortgage (ARM)?

A 5/6 hybrid ARM offers a fixed interest rate during the initial five years, after which the rate adjusts every six months. This mortgage blends the stability of a fixed-rate loan with the flexibility of an adjustable-rate mortgage.

Key Points to Remember

• The interest rate remains fixed for five years before adjusting biannually.
• Adjustments are typically tied to a widely recognized benchmark index.
• Borrowers face the risk of rising payments if interest rates increase.

How Does a 5/6 Hybrid ARM Function?

The loan starts with a stable interest rate for five years. Afterward, the rate fluctuates based on a benchmark index like the prime rate, plus a lender’s margin. For example, if the index is 4% and the margin is 3%, the total interest rate will be 7%.

To protect borrowers, these ARMs often include caps limiting how much the rate can increase over time, helping maintain affordable payments.

Pro Tip

Research thoroughly to find the mortgage option that best suits your financial goals.

Understanding Indexing in 5/6 Hybrid ARMs

Lenders commonly use indexes such as the U.S. prime rate or Constant Maturity Treasury (CMT) rate to determine interest rate adjustments. In environments where rates are rising, longer intervals between rate changes, like in a 5/1 ARM, may benefit borrowers more than a 5/6 ARM. Conversely, in falling rate climates, a 5/6 ARM could be advantageous.

Comparing 5/6 Hybrid ARMs to Fixed-Rate Mortgages

Advantages of a 5/6 Hybrid ARM

These ARMs usually start with lower interest rates compared to fixed-rate mortgages, offering potential savings, especially if you plan to sell or refinance before the fixed period ends. Always check for prepayment penalties that might affect your ability to exit early.

Potential Drawbacks

The main risk is the possibility of rising interest rates after the fixed period, which can lead to higher monthly payments. Fixed-rate mortgages avoid this risk by maintaining a consistent rate. Caps on rate increases can help manage this risk with a 5/6 hybrid ARM.

What Exactly Is an Adjustable-Rate Mortgage?

An ARM is a home loan with an interest rate that varies after an initial fixed period. Rates reset periodically, which can be annually or even monthly, depending on the loan terms.

How Is the Interest Rate Set on a 5/6 ARM?

The initial five-year fixed rate depends on your credit and current market rates. After five years, the adjustable rate is calculated by adding a lender margin to a benchmark index like the prime rate.

Are There Limits to Rate Increases on a 5/6 ARM?

Yes, most 5/6 hybrid ARMs include caps that restrict how much the interest rate can rise during each adjustment period and over the loan’s lifetime.

Final Thoughts

The 5/6 hybrid adjustable-rate mortgage offers an appealing mix of fixed-rate stability and adjustable-rate flexibility. With an initial fixed rate for five years followed by semiannual adjustments tied to benchmark indexes, it can be a strategic choice for many borrowers looking to optimize their mortgage payments.

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