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This is part of an ongoing blog series where we discuss common mortgage financing strategies used by home buyers and homeowners in Washington. Today, we’ll look at why some borrowers use adjustable-rate mortgage loans when buying a house in Washington. Specifically, we will examine the 5/1 hybrid ARM loan.
Adjustable-rate mortgages come with certain perks, including introductory rates that are often lower than that of fixed-rate mortgages. Depending on your situation and what rates are doing at any particular moment, you may want to consider a 5/1 hybrid ARM loan for your mortgage to buy a home in Washington.
Here’s a quick recap for those who aren’t familiar with the terminology:
The most popular mortgage option among home buyers in Washington State (and nationwide) is the 30-year fixed rate mortgage loan. This loan carries a fixed rate and has a repayment term of 30 years, hence the name. Some borrowers prefer this option because it offers predictability over the long-term.
Adjustable-rate mortgages, such as the 5/1 ARM loan, are popular with home buyers who want to secure the lowest possible mortgage rate when buying a house in Washington. That’s because ARM loans tend to start off with lower rates than their long-term fixed counterparts.
For example, here’s a snapshot of the average rates reported by Freddie Mac on May 2, 2022:
As you can see, the average rate assigned to the 5/1 ARM is considerably lower than the average for the more popular 30-year fixed mortgage. This is the primary appeal of ARM loans. Some borrowers choose adjustable mortgages in order to secure a lower rate during the first few years of the term.
Related: Paying points to discount the rate
In the average rates presented above, you’ll notice that the last mortgage category was labeled as “5/1 ARM” loan. The ARM acronym stands for adjustable-rate mortgage. We cover that above.
But what about the 5/1 designation? This indicates that the loan is actually a “hybrid” mortgage product that starts off with a fixed rate of interest for the first five years, and then changes every one year after that. That’s where the 5/1 label comes from.
Definition: A hybrid ARM loan is one that combines the features of both a fixed and adjustable-rate mortgage products. It starts off with a stable interest rate for the first few years (typically three, five or seven years), and then begins to adjust annually after that initial phase.
There are several different versions of the adjustable rate mortgage. The hybrid 5/1 ARM loan is one of the most popular options among Washington home buyers.
Many of the home buyers who take out ARM loans plan to either sell or refinance the home after a few years. In many cases, it’s possible to refinance an ARM loan into a more stable fixed-rate mortgage. We’ve covered that strategy here.
Other borrowers choose the 5/1 hybrid ARM loan (or a similar product) because they expect to stay in the home only for a few years. This is frequently the case with military members, or people who relocate periodically for work.
At Sammamish Mortgage, we’ve been helping home buyers and homeowners across Washington, Oregon, Idaho, and Colorado since 1992. We offer competitive rates on a variety of mortgage programs, including both fixed and adjustable rate loans, as well as our Diamond Homebuyer Program, Cash Buyer Program, and Bridge Loans. Please contact us with your financing questions or to receive a rate quote.
Whether you’re buying a home or ready to refinance, our professionals can help.
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No Obligation and transparency 24/7. Instantly compare live rates and costs from our network of lenders across the country. Real-time accurate rates and closing costs for a variety of loan programs custom to your specific situation.