A 5/6 Hybrid Adjustable-Rate Mortgage (5/6 Hybrid ARM) is a type of mortgage that combines features of both fixed-rate and adjustable-rate mortgages. It typically begins with a fixed interest rate for the first five or six years and then adjusts to an adjustable rate for the remaining loan term.
Advantages:
- Lower initial interest rate: The initial fixed rate period of a 5/6 Hybrid ARM is typically lower than the rate for a fixed-rate mortgage, which can lead to lower monthly payments for the first five or six years of the loan.
- Flexibility: After the initial fixed rate period, the interest rate can adjust, which can be beneficial if interest rates decrease.
Disadvantages:
- Interest rate risk: After the initial fixed rate period, the interest rate can adjust, which can be detrimental if interest rates increase. This can lead to higher monthly payments and an increased risk of default.
- Complexity: The terms and conditions of a 5/6 Hybrid ARM can be complex and difficult to understand, making it important for borrowers to fully understand the loan terms before committing to it.
Compared to a fixed-rate mortgage, a 5/6 Hybrid ARM may be a good option for borrowers who are comfortable with some level of interest rate risk and want the potential for lower monthly payments in the short-term. However, it’s important to consider the potential for increased interest rates and higher payments in the future before committing to this type of loan.
How 5/6 Hybrid ARM Indexed?
Lenders use various indexes to set interest rates on 5/6 hybrid ARMs, such as the U.S. prime rate and the Constant Maturity Treasury (CMT) rate. The London Interbank Offered Rate (LIBOR) was once commonly used, but it is being phased out. In a rising-interest-rate environment, longer periods between interest rate reset dates benefit borrowers, for instance, a 5/1 hybrid ARM is better than a 5/6 ARM as it adjusts less frequently. The opposite holds true in a falling-interest-rate environment.
Difference Between 5/6 Hybrid ARM vs. Fixed-Rate Mortgage
A 5/6 Hybrid Adjustable Rate Mortgage (ARM) is a type of mortgage where the interest rate is fixed for the first five years and then adjusts every six months after that. The interest rate is typically based on an index, such as the U.S. prime rate or the Constant Maturity Treasury (CMT) rate. The rate can change based on the index and the lender’s margin.
On the other hand, a fixed-rate mortgage is a type of mortgage where the interest rate is fixed for the entire loan term, usually 15 or 30 years. The interest rate does not change over time, which means the monthly payments remain the same.
The main difference between a 5/6 Hybrid ARM and a fixed-rate mortgage is that with an ARM, the interest rate is adjustable after the initial fixed period, and with a fixed-rate mortgage, the interest rate is fixed for the entire term. Borrowers who choose a 5/6 Hybrid ARM may face a higher interest rate in the long run, but they may benefit from a lower interest rate during the initial fixed period.
5/6 Hybrid ARM FAQs
What is a 5/6 Hybrid Adjustable-Rate Mortgage (ARM)?
- A 5/6 Hybrid ARM is a type of mortgage where the interest rate is fixed for the first five years and then adjusts every six months after that.
How is the interest rate determined?
- The lender will set the initial five-year fixed rate based on the borrower’s creditworthiness and current market interest rates. After the fixed period, the interest rate is based on an index such as the prime rate, plus a percentage added by the lender, known as the margin.
Are there any protections in place to prevent high interest rate rises?
- Many 5/6 Hybrid ARMs, and other types of ARMs, have caps that limit the increase in interest rate in a given period and over the life of the loan. It is important to check if the ARM you are considering has such caps and understand the maximum interest rate it could reach.