What is a 5 1 loan

what is a 5 1 loan

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A 5/1 ARM is a loan product where the loan rate is fixed for the first five years of the loan. The "5" is the initial fixed term; the "1" shows that the rate will adjust once per year after the initial five year term.

Like any adjustable rate mortgage the changes in the rate are based on an index and a margin. The index is typically the treasury yield or the LIBOR. The index changes when market rates change. This is the variable portion of the

loan. The margin is the spread over the index. This is set contractually and represents the lenders interest income over time. Adding these two numbers together gives you the "fully indexed rate" or the maximum rate you can be charged when the loan adjusts.

There are safety measures built into this type of loan to keep rates from going up too quickly. These measures are the caps on the rate increase. Typically, if a loan moves once a year the cap is a maximum increase of only 2%. Be careful though as in most 5yr fixed ARMS the first adjustment can be as much as 5%.

I typically only refer this type of loan to a borrower who is confident they will only own the property for less than 5 years. This is why this type of loan was created and since rates on these loans are lower they can be used effectively in these cases to lower the total cost to the borrower.

I hope this helps. If I can answer any other questions feel free to contact me directly. I'm just down the road in Eugene.

    October 27 2010

Source: www.zillow.com

Category: Credit

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