5-6 Hybrid Adjustable-Rate Mortgage (5-6 Hybrid ARM)

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5/6 Hybrid Adjustable-Rate Mortgage (5/6 Hybrid ARM)

A 5/6 hybrid adjustable-rate mortgage (ARM) carries a fixed interest rate for the first five years, then the rate adjusts every six months for the remainder of the loan term. It blends features of a fixed-rate mortgage (initial stability) with those of an ARM (later variability).

Key takeaways

  • Fixed rate for the first five years; rate resets every six months thereafter.
  • Subsequent rates are tied to a benchmark index plus a lender margin.
  • Many 5/6 ARMs include caps that limit how much the rate can rise, but payments can still increase and become unaffordable if rates climb.

How a 5/6 Hybrid ARM works

  • Initial period: Borrower pays a fixed interest rate for five years.
  • Adjustment period: After five years, the interest rate resets every six months based on:
  • A benchmark index (e.g., the prime rate or Constant Maturity Treasury, CMT).
  • A lender-added margin (a fixed number of percentage points).
  • Fully indexed rate = index + margin. Example: index 4% + margin 3% = 7% interest.

Indexes and reset frequency

  • Common indexes: prime rate, CMT, and others chosen by the lender.
  • Reset frequency matters:
  • More frequent resets (every six months) mean the borrower’s rate will reflect market moves sooner.
  • In a rising-rate environment, less frequent resets (e.g., a 5/1 ARM, which adjusts annually) may be preferable because the rate won’t change as often.
  • In a falling-rate environment, more frequent resets can allow the borrower to benefit sooner from rate declines.

Rate caps and protections

Most ARMs include caps to limit increases:
* Periodic caps: limit how much the rate can change at each reset.
* Lifetime (aggregate) caps: limit the total increase over the life of the loan.
Caps vary by loan; always confirm the specific cap structure with the lender.

Advantages

  • Lower initial interest rates compared with typical fixed-rate mortgages, which can mean lower monthly payments during the fixed period.
  • Potential savings if you plan to sell or refinance before the adjustable period begins.

Disadvantages and risks

  • Interest rate risk: after five years, rates can increase every six months, potentially raising monthly payments significantly.
  • Complexity: you must understand index, margin, caps, reset frequency, and any prepayment penalties.
  • Uncertainty for long-term planning compared with a fixed-rate mortgage.

How the initial and adjustable rates are set

  • Initial five-year fixed rate is based on your credit profile and prevailing market rates at loan origination.
  • After five years, the adjustable rate = selected index + lender margin, subject to cap limits.

When a 5/6 ARM might make sense

  • You expect to sell the home or refinance before the adjustable period begins.
  • You anticipate stable or falling interest rates in the medium term.
  • You want a lower initial rate and are comfortable with some interest-rate risk.

Questions to ask a lender before choosing a 5/6 ARM

  • Which index is used and what is the current index value?
  • What is the lender’s margin?
  • What are the periodic and lifetime rate caps?
  • Are there prepayment penalties or other fees?
  • How often will payments be recalculated and could the payment amount (not just the rate) change?

Bottom line

A 5/6 hybrid ARM offers a lower fixed rate for five years, then adjustments every six months tied to an index plus a margin. It can reduce early payments and be attractive if you plan a short-term stay or refinancing, but it exposes you to periodic rate increases and greater long-term payment uncertainty. Carefully review index, margin, cap structure, and fees before deciding.