What Is A 5/6 ARM Mortgage?

When exploring mortgage options, you may come across the 5/6 Adjustable-Rate Mortgage (ARM)—a loan that offers an initial fixed interest rate for five years before adjusting every six months. This type of mortgage can be appealing for homebuyers looking to take advantage of lower initial rates while planning for future flexibility. However, it’s important to understand how the loan works, how interest rates are determined, and whether a 5/6 ARM aligns with your financial goals. 

In this guide, we’ll break down everything you need to know about a 5/6 ARM mortgage, including pros and cons, how the 5/6 ARM compares to other loan types, and key factors to consider before choosing this option. Whether you’re a first-time homebuyer or refinancing an existing loan, this information will help you make an informed decision about whether a 5/6 ARM is right for you.

Subscribe to our blog to receive notifications of posts that interest you! 

What is a 5/6 ARM loan? 

A 5/6 Adjustable-Rate Mortgage (ARM) is a hybrid loan that starts with a fixed interest rate for the first five years, after which the rate adjusts every six months. The name “5/6 ARM” comes from this structure:

• “5” refers to the initial five-year fixed-rate period, during which borrowers enjoy predictable monthly payments.
• “6” indicates that after the fixed period, the interest rate adjusts every six months based on a financial index.

This mortgage type is designed to provide a lower interest rate in the initial years compared to fixed-rate mortgages. However, after the fixed period ends, borrowers may experience fluctuations in their interest rate and monthly payment, depending on market conditions.

The 5/6 ARM loan is ideal for buyers who:

• Plan to sell or refinance before the adjustable period begins.
• Are comfortable with potential interest rate fluctuations.
• Want lower initial monthly payments compared to a fixed-rate loan. 

How does a 5/6 ARM work? 

A 5/6 ARM loan follows a structured timeline with distinct phases: 

Fixed-Rate Period (First 5 Years): During the first five years, the interest rate remains unchanged. This provides stability and predictability, making it easier for mortgage borrowers to plan their budgets.

Adjustment Period (Starting Year 6): Once the fixed period ends, the loan enters the adjustable-rate phase, where the interest rate changes every six months.

Interest Rate Adjustments: The new rate is determined by adding a lender-specified margin to a financial index, such as the Secured Overnight Financing Rate (SOFR) or U.S. Treasury yield. Depending on market conditions, the rate could increase or decrease, affecting monthly mortgage payments. 

Rate Caps to Protect Borrowers: Most 5/6 ARMs have rate caps, which limit how much the rate can change:

• Initial Adjustment Cap: Limits how much the rate can increase when the fixed period ends (often 2%). 
• Periodic Adjustment Cap: Controls how much the rate can increase at each six-month adjustment (typically 1% or 2%). 
• Lifetime Adjustment Cap: Sets a maximum increase over the life of the loan (usually 5% above the initial rate). 

These caps help prevent extreme spikes in payments, offering some protection to borrowers. 

How are 5/6 ARM mortgage rates determined? 

A 5/6 ARM mortgage rate is based on two key components:

Index Rate

• The index is a financial benchmark that reflects market conditions.
• Common indexes include SOFR, U.S. Treasury rates, or the Cost of Funds Index (COFI).

Lender Margin

• The margin is a fixed percentage that the lender adds to the index rate.
• If the index rate is 2% and the lender’s margin is 2.5%, the new mortgage rate would be 4.5%.

Rate Caps

• Rate caps protect borrowers by limiting how much the rate can increase during each adjustment period. 

Understanding how rates are determined can help borrowers predict potential payment changes after the fixed period ends. Direct Mortgage Loans can help you get a better understanding of your options and what loan product could be right for you. 

What should I keep in mind when shopping for 5/6 ARM? 

Before committing to a 5/6 ARM mortgage, consider the following:

Initial Rate Period

• The first five years offer a fixed, lower interest rate. 
• If you plan to stay in your home beyond five years, prepare for potential rate increases. 

Adjustment Frequency

• Unlike a 5/1 ARM (which adjusts annually), a 5/6 ARM adjusts every six months.
• This means rates may change more frequently, leading to fluctuating monthly payments. 

Rate Caps and Limits

• Always check the loan’s initial, periodic, and lifetime caps to understand the worst-case scenario.

Index and Margin

• Different lenders use different financial indexes, which could impact future rate adjustments. 

Refinancing Options

• If you’re concerned about rising rates, consider refinancing an ARM loan before the adjustable period begins. 

By evaluating these factors, you could determine if a 5/6 ARM mortgage aligns with your financial strategy.

5/6 ARM Mortgage Example 

Let’s say you take out a 5/6 ARM loan with the following terms:

• Initial Fixed Interest Rate: 3% 
• Fixed-Rate Period: 5 years 
• Adjustment Period: Every 6 months after the fixed period 

Here’s how your payments could change: 

• Years 1–5: You pay a fixed 3% interest rate, resulting in stable monthly payments. 
• Year 6: The rate adjusts based on market conditions. If the index rate is 2% and the lender’s margin is 2.5%, your new rate could be 4.5%. 
• Subsequent Adjustments: Every six months, the rate could increase or decrease, depending on market trends and rate caps. 

This example highlights the importance of preparing for potential rate changes once the adjustable period begins. 

How 5/6 ARMS compare to other loans 

When deciding on a mortgage, it’s important to compare different loan options to find the best fit for your financial situation. A 5/6 ARM offers a unique structure that differs from other adjustable-rate and fixed-rate mortgages. While the product provides lower initial interest rates, the frequent adjustments after the fixed period may make it less predictable compared to other loan types. Understanding how a 5/6 ARM compares to other ARM loans and fixed-rate mortgages could help you determine whether this option aligns with your homeownership goals.

5/6 ARM vs other ARM Mortgages 

• 5/6 ARM: Adjusts every six months after the fixed period. 
• 5/1 ARM: Adjusts annually after the fixed period.
• 7/6 ARM or 10/6 ARM: Offer a longer fixed period (seven or ten years) before adjusting every six months. 

5/6 ARM vs Fixed Rate Mortgage 

• Fixed-Rate Mortgage: Provides long-term stability with a constant interest rate.
• 5/6 ARM: Offers a lower initial rate but potential future rate fluctuations. 

Pros and Cons of a 5/6 ARM Mortgage 

5/6 ARM Pros 

• Fixed Initial Rates: The 5/6 ARM provides a unique structure with a fixed interest rate for the first five years, followed by adjustments every six months. For some homeowners, this offers the potential to benefit from future interest rate decreases. If you’re considering a mortgage with built-in adaptability, a 5/6 ARM could be a valuable option to explore. 
• Good for Short-Term Buyers: Ideal for those who plan to sell or refinance before the adjustable period begins. 
• Potential Cost Savings: If market rates stay low, borrowers may benefit from reduced payments. 

5/6 ARM Cons 

• Rate Uncertainty: After the fixed period, monthly payments could increase significantly. 
• Complex Loan Terms: Requires an understanding of rate caps, index rates, and lender margins.
• Potential Refinancing Costs: Borrowers may need to refinance to avoid higher rates, which comes with additional costs. 

Is a 5/6 ARM a good idea? 

Deciding whether a 5/6 ARM is a good choice depends on your financial situation, future plans, and risk tolerance. While this loan offers a lower initial interest rate, its adjustable nature after the first five years means that borrowers need to be prepared for potential fluctuations. Below are some key factors to consider when determining if a 5/6 ARM mortgage is right for you.

A 5/6 ARM Might Be a Good Idea If: 

You Plan to Sell or Refinance Before the Adjustable Period Begins 

If you anticipate moving or refinancing within five years, you could take advantage of the lower initial rate without worrying about future adjustments. This is particularly beneficial for military families, young professionals, or those planning to relocate in the near future.

You Want Lower Initial Payments 

Compared to fixed-rate mortgages, 5/6 ARMs typically have lower interest rates during the fixed period, which could mean lower monthly payments.

You Can Handle Potential Rate Increases 

If your income is expected to grow, you may be able to absorb potential increases in monthly payments after the fixed period ends. Some borrowers also plan to make extra payments during the fixed period to reduce their loan balance before adjustments begin.

A 5/6 ARM Might Not Be a Good Idea If: 

You Plan to Stay in Your Home Long-Term 

If you intend to live in your home for 10+ years, a fixed-rate mortgage might be a safer option, providing long-term stability and avoiding future rate increases.

You Are Uncomfortable With Payment Uncertainty 

Since the 5/6 ARM adjusts every six months after the fixed period, payments could rise frequently, making budgeting more challenging. If you prefer predictable payments, a fixed-rate mortgage may be a better choice.

Interest Rates Are Expected to Rise Significantly 

If mortgage rates are projected to increase in the future, refinancing or adjusting to higher rates could make this loan more expensive in the long run. 

Final Verdict About an ARM Mortgage

A 5/6 ARM mortgage could be a smart financial move for short-term homeowners, borrowers expecting income growth, or those who plan to refinance before rate adjustments begin. However, for buyers looking for long-term stability, the uncertainty of interest rate changes may make a fixed-rate mortgage a better choice.

5/6 ARM Mortgage FAQ’s 

What happens when the fixed period ends? 

Once the five-year fixed-rate period ends, the 5/6 ARM transitions into its adjustable phase. At this point:

• The interest rate will adjust every six months based on a financial index (such as SOFR or the U.S. Treasury rate) plus a fixed lender margin.
• If the index has increased since the loan was originated, your interest rate and monthly payment will likely rise.
• Conversely, if the index has decreased, your payments may go down.
• Rate caps will limit how much the rate can increase or decrease at each adjustment.

It’s important to check with your lender about specific rate caps and prepare for potential fluctuations in your monthly payment after the fixed period ends. Direct Mortgage Loans prides itself in being transparent and can provide you with a knowledgeable loan officer to speak with. 

Can you refinance a 5/6 ARM loan? 

Yes, refinancing a 5/6 ARM is a common strategy for borrowers who want to:

• Lock in a fixed rate before the adjustable period begins to avoid uncertainty.
• Take advantage of lower rates if market conditions are favorable at the time of refinancing.
• Extend the loan term by switching to a fixed-rate mortgage or a different type of ARM.

When to refinance a 5/6 ARM: 

• Before the adjustable period begins (usually in the fifth year) to secure a fixed rate. 
• If interest rates are low, allowing you to refinance into a more affordable loan. 
• If your financial situation has changed, and you prefer stability over potential rate fluctuations. 

Refinancing does involve closing costs and a new application process, so it’s important to weigh the costs against the benefits before making a decision. Many borrowers refinance before the adjustable period begins to lock in a fixed rate. 

How long is a 5/6 ARM? 

A 5/6 ARM mortgage typically has a 30-year term. However, the loan is structured in two phases:

1. First 5 years: The interest rate is fixed, meaning your monthly mortgage payment remains unchanged. 
2. Remaining 25 years: The rate adjusts every six months, potentially causing payment fluctuations. 

Borrowers should be aware that even though the loan term is 30 years, the changing interest rate in the adjustable phase could impact the total amount of interest paid overtime.

What is the difference between 5/1 ARM and 5/6 ARM? 

Both 5/6 ARM and 5/1 ARM loans offer a fixed interest rate for the first five years, but they differ in how often the rate adjusts afterward. A 5/6 ARM adjusts every six months after the fixed period, meaning borrowers may see more frequent changes in their monthly payments. In contrast, a 5/1 ARM adjusts once per year, providing slightly more stability after the initial fixed period. Because of the more frequent adjustments, a 5/6 ARM may respond more quickly to market changes—either benefiting from falling rates or facing increases sooner than a 5/1 ARM. Borrowers who prefer predictability may lean toward a 5/1 ARM, while those comfortable with potential short-term fluctuations may find the 5/6 ARM more flexible.

What are the typical rate caps for a 5/6 ARM? 

Rate caps limit how much your interest rate can increase at different stages of the loan:

• Initial Adjustment Cap: Limits how much the rate can increase after the first five years. Typically, this is 2% above the initial rate. 
• Periodic Adjustment Cap: Restricts how much the rate can increase every six months after the first adjustment. This is usually 1% or 2% per adjustment period. 
• Lifetime Cap: The maximum amount your rate can increase over the life of the loan. Often, this is 5% above the starting rate. 

For example, if your starting rate is 3%, a typical rate cap structure would mean: 

• Year 6: Rate cannot increase beyond 5% (3% starting rate + 2% initial adjustment cap). 
• Year 7 and beyond: Adjustments are limited to 1% or 2% per six-month period. 
• Maximum rate over loan life: Cannot exceed 8% (3% + 5%). 

Understanding rate caps helps borrowers anticipate the worst-case scenario and plan accordingly for future payments.

Are there penalties for early repayment? 

Some 5/6 ARM loans may include prepayment penalties, which are fees charged if you pay off the loan early through refinancing, selling your home, or making extra principal payments.

Possible types of prepayment penalties include: 

• Flat Fee: A fixed charge for paying off the loan early. 
• Percentage of Loan Balance: A penalty calculated as a percentage (e.g., 2%) of the remaining loan balance. 
• Declining Penalty: The penalty decreases each year and disappears after a set period (e.g., 3 years). 

How to avoid prepayment penalties: 

• Ask a loan officer if there is a prepayment penalty clause in your mortgage. 
• If penalties exist, find out how long they apply and whether refinancing triggers them. 
• Consider choosing a loan without a prepayment penalty if flexibility is important to you. 

Many modern 5/6 ARM loans no longer include strict prepayment penalties, but it’s essential to check with your lender to confirm.

Eligibility and approval is subject to completion of an application and verification of home ownership, occupancy, title, income, employment, credit, home value, collateral and underwriting requirements. Direct Mortgage Loans, LLC NMLS ID# is 832799 (www.nmlsconsumeraccess.com). Direct Mortgage Loans, LLC office is located at 11011 McCormick Rd Ste 400, Hunt Valley, MD 21031.