30-Year Fixed vs. 5/1 ARM

June 24, 2011 6 Comments »
30-Year Fixed vs. 5/1 ARM

Here we go again…it’s that special time where we compare two popular loan programs to see how they stack up against each other.

Today’s match-up: “30-Year Fixed vs. 5/1 ARM.”

Everyone has heard of the 30-year fixed-rate mortgage – it’s far and away the most popular type of loan out there. Why? Because it’s the easiest to understand, and presents no risk of adjusting during the entire loan term.

But what about the 5/1 ARM? Do you even know what a 5/1 ARM is?

Put simply, it’s an adjustable-rate mortgage with a 30-year term that’s fixed for the first five years and adjustable for the remaining 25 years.

After the first five years are up, the interest rate can adjust once annually, both up or down.

It’s a pretty popular ARM product, and most mortgage lenders offer it, including ING, via its Easy Orange Mortgage.

So what’s the draw of the 5/1 ARM?

Well, the biggest advantage to the 5/1 ARM is the fact that you get a lower mortgage rate than you would if you opted for a traditional 30-year fixed. That’s the tradeoff for that mortgage rate stability.

But how much lower? Currently, the spread is about 1.25%, with the 30-year averaging 4.50 percent and the 5/1 ARM coming in at 3.25 percent, per Freddie Mac data.


Loan amount: $350,000
30-year fixed payment: $1,773.40
5/1 ARM payment: $1,523.22

So you’d be looking at a difference in monthly mortgage payment of $250, or $3,000 annually ($15,000 over 5 years), using our example from above. Not bad, right?

Well, there’s just one little problem.

It might not always be that way. In fact, it might only be that way for the first five years of your 30-year loan.

After those initial five years are up, you could face an interest rate hike, meaning your 5/1 ARM could go from 3.25 percent to 4.50 percent or higher, depending on the associated margin and mortgage index.

ARMs Low But Will Likely Head Higher

Currently, mortgage indexes are super low, but they’re expected to rise in coming years as the economy gets back on track, which it will eventually.

And you should always prepare for a higher interest rate adjustment if you’ve got an ARM.

[Why adjustable-rate mortgages are bad news right now.]

So that’s the big risk with the 5/1 ARM. If you don’t plan to sell or refinance before those first five years are up, the 30-year fixed may be the better choice.

Although, if you sell or refinance within say seven or eight years, the 5/1 ARM could still make sense given the savings realized during the fist five years. And most people either sell or refinance within 10 years.

Just be sure you can actually handle a larger monthly mortgage payment should your rate adjust higher.

If you plan to actually pay off your mortgage, an ARM is probably a bad idea. There’s a good chance you’ll pay a lot more than you would have had you gone with the 30-year fixed.

However, if you’re a savvy investor and have a healthy risk-appetite, the 5/1 ARM could mean some serious savings, especially if the extra money is invested somewhere else with a better return for your money.

Five years not enough? Check out the 30-year fixed vs. the 7-year ARM.


  1. Belinda Hughes November 3, 2015 at 12:32 pm -


    I am 50, single and own my own home with a 30 years mortgage and I in 7 years in. I am considering a re-fi to a 5/1 Arm Loan to paid off in 5 years. I then want to sell and repurchase a different home using the proceeds from the sale. In your opinion, does the 5/1 make sense in this situation? If not, please explain

  2. Colin Robertson November 9, 2015 at 3:49 pm -


    A 5/1 ARM has a 30-year repayment period, it’s just fixed for the first five years and adjustable for the remaining 25 years. So not sure that would accomplish what you’re looking to do.

  3. Chrystal November 24, 2015 at 9:35 am -

    Can a 5/1 typically be paid off at 5 years or before without penalty? If we were to refinance at the 5/1 arm rate we could stack enough extra on the principle to pay off the balance within the 5 years. Basically, can you make extra principle payments on a 5/1 arm loan and pay it off early? Are there typically penalties for that?

  4. Colin Robertson December 1, 2015 at 12:05 pm -


    Yes, as long as there isn’t a prepayment penalty, which aren’t as common these days.

  5. nancy February 3, 2016 at 11:25 am -

    Hi Colin – We’re both in our 50’s and relocating to CA from AZ. We’re selling a house with a 30-year term at a horrible interest rate (never refinanced because we kept thinking we’d just sell) and now we don’t know what kind of mortgage we should get when we re-purchase in CA. We’re going down to one steady income from two while I freelance. We’re computer people, not finance people!

  6. Colin Robertson February 3, 2016 at 2:49 pm -


    Sounds like you’ll probably have to get a 30-year loan (as opposed to 15) if on a single income and moving to expensive California from much cheaper Arizona. You can go with an ARM as well (that also has a 30-year term) but the rate will only be fixed for some period of those 30 years, such as three, five years, seven, etc. The big risk is that it can adjust higher…the benefit is you get a lower rate and could sell/refinance before it ever adjusts. The choice is yours. Good luck!

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