What Does 5/3 ARM Mean?

Mortgages come in two flavors - fixed interest rates which is generally what we think of with home loans, such as a 30 year fixed-rate mortgage.

But mortgages can also come with variable or adjustable interest rates. It's where the word "ARM" comes from - Adjustable Rate Mortgage.

So What Do Those Numbers Mean?

The numbers before "ARM" as in "5/3 ARM" or "3/1 ARM" indicate the terms of the interest fluctuations.

The first number indicates how long the introductory or intial interest rate stays fixed in years. The second number indicates how often the interest rate will fluctuate in months.

Think of it like this: (Fixed Rate in Years)/(Adjustable Rate in Months) ARM.

So a "5/3 ARM" means you'll get the introductory interest rate, which is often lower than the interest rate of a fixed rate mortgage, for five years straight before it starts fluctuating or adjusting every 3 months.

That Sounds Risky

It absolutely is. Depending on interest rates at the time, the interest rate may adjust down or decrease lower than the interest rate you started with, but it can also adjust up or increase to interest rates higher than you would have gotten with a fixed rate mortgage.

And depending on your finances at the time of the adjustment, it could mean you aren't able to pay you mortgage on time.

Why Do It?

For most people, getting a fixed rate mortgage is the way to go. But for others, it might not be the best option. For example, if you're considering buying a house in a city like LA where house prices go up in value quickly while living in a time when interest rates are higher than they've been in the past, then getting an ARM means you can benefit from a lower interest rate and then refinance when interest rates go down again in the future.

For example, a 10/6 ARM means you'll benefit for 10 years from a lower interest rate while waiting on the Fed to lower rates.

If they lower rates before the 10 years are up, you can refinance into a lower interest rate fixed mortgage with a rate and term refinance, which means you can either pay off the loan more quickly or keep the same number of payments but lower each monthly payment.

If they don't lower the interest rates before the 10 years are up, you can still do a rate and term refinance for the remaining 20 years, ensuring you avoid the ups and downs of the adjustable rate period.

Other people who benefit from ARM are those who don't plan on living in the same house for more than the fixed rate period.

So if you only plan on living in the house five years, a 5/3 or 7/6 Mortgage might be better for you than a 30 year fixed rate mortgage at a higher interest rate.

Conclusion

Just because a mortgage's interest rates can change during the life of the loan doesn't automatically make it bad. The right mortgage for you may be different from the right mortgage for your neighbor.

To figure out what mortgage works best for you, it is best to speak to a lender directly, especially since they only get paid if you actually get a loan. Otherwise, they're just a knowledgeable advisor who is giving good advice for free.

At LA Mortgage Dude and Mission San Jose Mortgage, we take pride in finding the best loan product for our clients depending on their needs. If you believe an adjustable rate mortgage is right for you, ask about our Jumbo 10/6, 7/6, and 5/6 ARMs.