What Is a 5/5 ARM and Should I Get One?
A 5/5 adjustable-rate mortgage (ARM) offers a low, fixed interest rate for the first few years of your loan term. It could save you money if current ARM rates are lower than 30-year fixed mortgage rates — but only temporarily. Once the initial fixed-rate period expires, you could end up with an unaffordable mortgage payment if your rate adjusts upward.
We’ll show you how to evaluate whether an ARM makes sense for you, as well as how to choose one that won’t put you in financial distress down the road.
What is a 5/5 ARM?
A 5/5 ARM is an adjustable-rate mortgage with an initial fixed rate for the first five years of a 30-year loan term. After five years, the mortgage rate is variable and can change every five years for the remaining loan term.
One of the unique features of the 5/5 ARM is the longer adjustment period after the first five-year period ends. Many lenders offer 5/1 ARMs, which adjust every year after the fixed-rate period ends. A 5/5 ARM gives you five years in between adjustments, which offers a little more breathing room in your budget for those in-between periods when your monthly payments aren’t changing.
How does a 5-year ARM work?
Here are the standard features of five-year ARMs, a group that includes 5/5 ARMs:
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- Rate adjustments. The rate adjustments on a 5/5 ARM happen after five years and then every five years after that. These adjustments are tied to a benchmark called an index, which fluctuates with the broader market. The index helps determine exactly how much your ARM’s interest rate changes, and whether it will adjust up or down.
- Periodic adjustment caps. These caps limit how much your rate can rise at each adjustment. For example, a 5/5 ARM with a starting rate of 6% and a 2% adjustment cap can’t go higher than 8% at the first adjustment.
- Lifetime rate adjustment maximum. Most ARMs feature a 5% lifetime rate adjustment maximum, which means that the rate can never rise more than 5 percentage points above the initial rate.
Need more details on how ARMs work? Check out the Consumer Handbook on Adjustable-Rate Mortgages Booklet, which lenders are required to provide to ARM loan borrowers.
Is now a good time for a 5/5 ARM loan?
Right now, a 5/5 ARM can offer a lower interest rate than a comparable fixed-rate mortgage. However, you can’t assume that ARMs will always outcompete 30-year fixed-rate mortgages — in recent years, these products have gone back and forth, neither reliably outcompeting the other.
As recently as 2022, for instance, ARM rates were lower than fixed rates by a substantial amount — enough that borrowers could save about $157 on their monthly mortgage payments if they went with an ARM instead of a fixed-rate loan. But since then, ARM rates have risen faster than 30-year fixed-rate loans. Today, ARMs are sometimes more expensive than fixed-rate loans, sometimes not. To find an ARM that outcompetes a 30-year mortgage, you’ll need to shop around.
Comparing 5/5 ARM and 5/1 ARM loans
Both a 5/1 ARM and a 5/5 ARM offer a fixed rate for the first five years. However, the second number in the ARM’s name tells you when your rate and payment could change after your fixed-rate timeline is up: The 5/1 ARM adjusts every year, while the 5/5 ARM adjusts every five years.
Which is right for me? 5/1 ARM vs. 5/5 ARM payments
Below, we’ll go through an example that shows how the interest rate and payments on an ARM might change over time, comparing how that picture differs for a 5/1 versus 5/5 ARM. As you’ll see, 5/1 ARMs have the potential to become unaffordable much faster than 5/5 ARMs.
Both 5/5 ARMs and 5/1 ARMs come with rate adjustment caps that limit how high your rates and payments can go. For this example, we’ll deal with a hypothetical $400,000 loan amount and assume the loan comes with a 2% cap for every rate adjustment and a 5% lifetime cap. The images below compare their payments and rates over time.
The takeaway:
A 5/5 ARM gives you more time to adjust to higher monthly payments after your initial fixed-rate period ends than the 5/1 ARM. In our example, it took 16 years for the payments on a 5/5 ARM to hit their maximum, but only eight years for a 5/1 ARM.
Pros and cons of 5/5 ARMs
| Pros | Cons |
|---|---|
Your initial rate could be lower compared to a 30-year fixed-rate loan You may qualify for a slightly higher loan amount than you would with a 30-year fixed-rate mortgage, because your rate and payment are lower You have more time between adjustments compared to 5/1 ARMs You could use the extra savings to pay off your mortgage faster or pursue other financial goals | You may have to do some extra searching to find lenders that offer 5/5 ARMs, rather than 5/1 ARMs You’re likely to end up with higher monthly payments after the fixed-rate period ends Your home’s value could drop, leaving you stuck in an ARM you can’t refinance You may have to pay a fee if you want to switch your loan to a fixed rate You won’t have the option to go with a government-backed loan, since neither FHA, VA nor USDA loans typically come with a 5/5 ARM option |
Is a 5/5 ARM loan right for me?
A fixed-rate mortgage is typically the best option for borrowers who plan to stay in their homes for the long haul and don’t want any fluctuations in their monthly payments.
However, a 5/5 ARM may be ideal for homebuyers who:
- Want to use the extra monthly savings to pay down their mortgages and build equity more quickly
- Expect substantial increases in earnings in the near future and can afford a potentially higher payment
- Plan to refinance or sell their home before the initial, five-year fixed-rate period ends
- Know that they can afford the ARM’s maximum payment
Tip: How to find an ARM’s maximum payment
If you know an ARM loan’s initial rate and its rate cap structure, you can calculate its maximum payment fairly easily. You can find this rate information in the “Adjustable Interest Rate Table” on Page 2 of your loan estimate. If you’d prefer to skip the math, you can also ask your lender to calculate it for you. You may also want to look at the “Projected Payments” section of your closing disclosure, which shows the range you can expect your payments to fall within for each rate adjustment.