With fixed mortgage rates climbing for the fourth week in a row, is it time for a 5/6 adjustable-rate mortgage? An ARM can be a smart way to lower your initial home loan payment. With home prices still rising, how much can you save? What are the long-term risks?
Tropical Financial offers a 5/6 ARM with a competitive rate fixed for the first five years. After that, it adjusts every six months based on a market index plus a margin. The monthly payment can increase or decrease, subject to caps set in the loan terms.
In February, the national average 5/6 ARM rate was about 6.39%, while the average 30‑year fixed had declined to 5.98%, according to survey information. The latter was clearly the better deal.
The picture drastically changed in March. The 5‑year ARM rate was in the 6.42–6.53% APR range, while the 30‑year fixed rate average climbed nearly one-half of a percentage point to 6.38%.
How recent rate movements have changed payments
Let’s say you’re paying $500,000 for a South Florida home with 10% down. You borrow $450,000 on a 30‑year term.
About 30 days ago, the monthly payment of principal and interest on a 30‑year fixed-rate mortgage at 6% was $2,698.
Fast forward to the end of March. Depending on the lender, you might pay the higher national average of 6.38%. The monthly payment will have risen to $2,807, about $1,300 more per year. By the time you lock in your rate, the amount could be higher.
Is a 5/6 ARM now a better deal? For illustration purposes, assume a rate of 4.875% (5.495% APR), the monthly payment on the same amount is $2,381. This represents a potential savings of approximately $25,000 over the initial five-year fixed period, assuming no refinancing and consistent loan terms.
That “ARM discount” may matter less once you weigh the risks of a variable rate against the security of a fixed rate.
Five reasons to choose a 5/6 ARM
- Lower initial rate (sometimes)
When ARM rates run below fixed rates, you can save on payments during the first five years. Recent averages show 5/6 ARMs are a bit below some 30‑year fixed quotes, which can trim your early monthly costs by hundreds of dollars per month on a $450,000 loan. - You plan to move or refinance within 5 years
If you’re fairly sure you’ll sell or refinance before the first adjustment, you essentially use the ARM as a five‑year fixed loan and may never face a rate change. This can be attractive when buying a first home, fulfilling a brief job assignment, or purchasing a “starter” property. - You expect your income to rise
Homebuyers in growing careers sometimes accept the risk of higher future payments because they anticipate larger paychecks later. A lower or comparable initial payment can help you qualify for financing today. - You’re comfortable managing rate risk
Some buyers track markets closely and are prepared to refinance, pay extra principal, or adjust their budget if rates move. If you like flexibility and can tolerate variability, a 5/6 ARM can be a good fit. - Rate caps offer some protection
5/6 ARMs usually include periodic and lifetime caps that limit each adjustment and the total increase over the life of the loan. While payments can still rise, the caps prevent unlimited jumps. For example, a typical 5/6 ARM may include a 2% initial adjustment cap, 1% periodic cap, and 5% lifetime cap, limiting how much the rate can increase over time.
Five reasons not to choose a 5/6 ARM
- Significant discount vs fixed rates for a limited time
While a significant gap now exists between 5/6 ARM rates and 30‑year fixed rates, it could narrow or reverse in five years. You’re taking on long‑term rate risk that could be wiped out in the following years. - Payment shock after year five
If market rates are higher when your ARM adjusts, your payment could jump significantly. For example, if your rate rises 1 percentage point on a $450,000 balance, your monthly principal and interest payment could increase significantly, depending on the remaining loan balance and amortization schedule. - Harder budgeting for long‑term owners
A 30‑year fixed gives you the same principal and interest payment for the life of the loan, which simplifies planning. With a 5/6 ARM, you must be ready for payment changes every six months after the first five years. - Refinancing is not guaranteed
A common strategy is “I’ll just refinance later,” but that depends on your income, credit, home value, and prevailing rates. If rates are higher or your finances change, you may be stuck with a more expensive adjustable payment. - Stress in a rising‑rate environment
The past month shows how quickly fixed rates can move. They jumped from about 5.98–6.00% up to 6.38%. The sudden increase added several hundred dollars to monthly payments. If that kind of volatility hits right as your ARM rate starts floating, your pocketbook could take a similar hit.
If you expect to sell or refinance within five years and can secure a meaningful rate advantage, a 5/6 adjustable-rate mortgage can be an effective short-term financing strategy. However, when the rate differential is minimal and long-term homeownership is the objective, a fixed-rate mortgage may provide greater payment stability and predictability.
An adjustable-rate mortgage is not suitable for all borrowers. Qualification, risk tolerance, and long-term financial goals should be carefully evaluated.
