5/1 ARM vs 15-year fixed? What’s better in 2022?

Michele Lerner
Michele Lerner
The Mortgage Reports Contributor
November 11, 2020 - 10 min read

5/1 ARM rates vs 15-year mortgage rates

Typically, 5/1 ARM rates are lower than 30-year fixed mortgages rates. They’re usually lower than 15-year fixed rates too, but by a smaller margin.

5/1 ARM rates and 15-year fixed mortgage rates start around 4.64% and 5.16%, according to Freddie Mac at the time of this writing.

Remember, your rate can be higher or lower than average rates based on your credit, debts, income, down payment, and other factors.

When deciding between 5/1 ARM rates and 15-year fixed rates, you also need to consider factors like the overall interest rate market and how long you plan to stay in your new home.

Here’s how to decide which loan program is best for you.


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Is a 5/1 ARM a good idea?

A 5/1 ARM can work out in your favor, but only under the right conditions.

There’s probably no reason to choose a 5-year ARM when fixed-rate loans are available at similar or lower rates.

But when ARM rates are lower during their introductory periods, then this is when a 5/1 ARM may be a good idea.

ARM pros

  • Lower payments and rates. The advantage of a 5/1 ARM is that during the first years of the loan when the upfront rate is fixed, you would get a much lower interest rate and lower payments.
  • Lower borrowing costs during the introductory period. If you plan to sell in less than five or six years, a 5/1 ARM could be a smart choice. In a five-year period, the savings from your lower rate could be enough to buy a new car or cover a year’s college tuition.

Keep in mind that the National Association of Realtors (NAR) pegs the average time owners keep their properties at about seven years. Younger buyers sell sooner, and older ones tend to stay longer.

ARM cons

The primary disadvantage of an ARM is the risk of interest rate hikes. For example, it’s possible the 5/1 ARM with a 4.6% start rate could (worst case) increase as follows:

  • Beginning of year six: 6.6%
  • Starting year seven: 8.6%
  • Years eight through 30: 9.6%

This doesn’t mean your ARM will increase; it means that it’s possible.

When a 15-year fixed-rate loan is a good idea

There’s another way to secure the lowest possible interest rate — if you can afford higher mortgage payments.

Traditionally, the 15-year fixed-rate mortgage carries an interest rate that’s similar to that of the 5/1 ARM.

In today’s market conditions, the 15-year fixed is about a half percentage point higher compared to the 5/1 ARM mortgage rate.

And unlike the ARM, the interest rate is fixed for the entire term of the home loan — no need to worry about rate increases.

The catch? You get half as much time to pay off your loan balance, so your monthly payments will be higher. But while your loan gets retired in half the time, your mortgage payment is NOT twice as high. Not even close.

At the time of writing, Freddie Mac’s average rates are as follows for a $300,000 loan amount:

  • 30-year fixed: 5.89%
  • 15-year fixed: 5.16%

The lower interest rate keeps your 15-year payment much lower than twice the 30-year payment. In fact, based on our online mortgage calculator, average Freddie Mac rates put principal and interest payments as follows on a $300,000 loan:

  • 30-year loan: $1,777/month
  • 15-year loan: $2,397/month

Clearly, the disadvantage of a 15-year loan is that it can be more difficult to afford the higher payment.

How to choose between a 5/1 ARM vs 15-year fixed-rate loan

If you plan to keep your home (and your mortgage) for just a few years, the 5/1 ARM may be a smart choice. At least, in market conditions when its interest rate can be lower than that of the 15-year loan.

Plus, you’d have the option of making a higher monthly payment when you want to and can afford it, but you’re not locked into a payment obligation that might be unaffordable.

On the other hand, if you plan to keep your home for a long time, and can comfortably afford the higher payment, the 15-year loan could be the better option.

Before committing to a higher loan payment, however, examine your finances and make sure you’ve done these things first:

  • Paid off any higher-interest debt
  • Maxed out your 401(k) if your employer offers matching contributions
  • Saved an emergency fund of two-to-six months’ expenses

As always, it’s essential to compare loan terms and rates based on your individual circumstances and long-term financial plans.

Low-rate vs high-rate economy

Borrowers in 2022 need to take a new look at their mortgage loan options and consider which loan works best for their refinance or purchase.

In a low-rate environment, more borrowers choose fixed-rate loans.

For example:

  • ARMs comprised just 2.5% of all closed mortgage loans in September 2020, when rates were near record lows
  • By comparison, ARMs made up 7.2% of all closed loans in September 2018, when rates were still on the rise

This is because when rates are low across the board, there tends to be a smaller difference (or “spread”) between adjustable rates and fixed rates.

In addition, when 5/1 ARM rates are close to 15-year fixed rates, there’s much less incentive for borrowers to opt for a riskier loan. Why choose an ARM when you could lock in an almost equally low rate for the full loan term?

Mortgage lenders will likely see more ARM mortgage applications next time rates increase by a percentage point or more — whenever that happens again.

When 5/1 ARMs are better than 15-year fixed

Like 5/1 ARM rates, 15-year fixed-rate loans are generally lower than those of 30-year fixed mortgages (which are arguably the most common type of mortgage).

But, there’s a key difference between 15-year fixed loans and 5/1 ARMs.

With a 15-year fixed-rate mortgage — as the name implies — your interest rate is fixed for the full loan term of 15 years. That means your rate and payment will never change, no matter what’s happening with the economy.

When you have a fixed-rate mortgage, the only way your loan terms can change is if you decide to refinance (whether for a lower rate, to take cash-out, or for another reason).

Thanks to the security they offer, most borrowers choose a 15- or 30-year fixed-rate mortgage over a 5/1 ARM.

But there are certain scenarios where ARM loans become more popular — usually when rates are on the rise, or when a homeowner only wants to stay in their home a few years. (Thus, they may benefit from the low fixed-rate period and move before their rate changes.)

What is a 5/1 ARM?

A 5/1 ARM is actually a 30-year mortgage loan.

The “5” means it has a fixed rate for the first five years of the loan. After that, the interest rate can change every “1” year, for the remaining 25 years, depending on how markets are moving.

An adjustable rate means your mortgage interest rate and payment could rise after the 5-year fixed-rate period. There’s a chance they could fall, too, but this is much less likely.

That said, a lender cannot issue you higher interest rates indefinitely. ARM rates can only move up or down a certain amount, within restrictions called “floors” and “caps.” (We explain this in more detail below.)

The amount of your loan’s rate adjustment will depend on several factors:

  • The index rate (a published financial indicator) on which your mortgage rate is based
  • The margin (the amount added to your interest rate above the index rate)
  • Caps on the amount a rate can rise or drop during a single rate adjustment
  • Floors, which limit how low the rate can go
  • Lifetime limits (which keep your loan’s variable rate from exceeding a certain level)

The starting rate for a 5/1 ARM’s introductory period is traditionally about one percentage point lower than similar 30-year fixed rates.

However, there can be a much larger or smaller gap between adjustable and fixed rates depending on the overall interest rate environment.

For example, in 2020, when mortgage interest rates were at record lows, there were times when ARM rates rose above fixed rates.

When this happens, it’s a uniquely good time to lock in a fixed-rate loan with an ultra-low interest rate that won’t change even if rates tick back up in the future.

Hybrid ARMs

Before the housing crisis in the late 2000s, home buyers could find some pretty creative ARM programs. You could find loans with rates that changed every month. Some even permitted loan balances to increase each month.

Today’s ARMs are much safer. These loans begin as fixed-rate mortgages for an introductory period of time lasting three to ten years. After this introductory rate expires, they convert to adjustable loans for the remaining number of years.

The loans are basically a “hybrid” between a fixed- and adjustable-rate mortgage.

Hybrid loan products begin resetting once the introductory rate expires, but rate adjustments are controlled by “rate caps,” so there’s a limit to how much a borrower’s interest rate and payment can rise. (More on caps later).

It’s possible ARM rates could decline, but they usually increase which means monthly mortgage payments increase too.

How 5/1 ARM rates adjust

After the introductory fixed-rate period, ARM rates can readjust each year. Whether or not your ARM interest rate changes — and how much it moves — depends on which rate index it’s tied to.

Previously, most adjustable-rate mortgages were based on an index called the 1-Year LIBOR. (LIBOR stands for London Interbank Offered Rate) or the Constant Maturity Treasury (CMT) securities index.

But as recently as 2021, the majority of ARMs will be based on the SOFR index instead. SOFR stands for Secured Overnight Financing Rate.

Avoiding the technicals, what you need to know is that SOFR is a measure of current interest rates in the overall lending market.

Your ARM rate would likely be based on the SOFR overnight lending rate, plus a certain percentage. This is called your “margin.”

For example, say your current mortgage rate on a 5/1 ARM was 2.5%, but you are nearing the end of your 5-year fixed period.

The current SOFR overnight financing rate is at 0.10%. The margin on your loan is 2.75% margin (this is fairly typical). If your rate were adjusting on this day, your new rate would rise from 2.5% to 2.85% (the index plus the margin).

But if the current SOFR rate were 1.5%, your new rate would rise from 2.5% to 4.25% — in one month. Your mortgage payment could rise by hundreds of dollars. That’s why it’s important to consider the “worse case scenario” when accepting an ARM loan.

So how do you figure out your “worse case” payment? Read on.

ARM caps and floors

There’s more to your ARM rate than simply taking its base index and adding a few percentage points.

There are also rules that restrict how much your rate can adjust. Imagine that your starting rate was 3%, and that was fixed for five years. Now, your 5/1 is adjusting for the first time.

Suppose its terms are 2/2/5. This means your interest rate:

  • Can increase no more than 2% at the first adjustment
  • Can increase no more than 2% for each future adjustment
  • Can never go higher than 5% above your initial interest rate

Your rate started at 3%, which means right now, it can’t go higher than 5%. And over the life of the loan, the rate can never exceed 8%.

As of this writing, Freddie Mac’s average 5/1 ARM interest rate is 4.64%.

When to refinance out of an ARM

Homeowners who currently have a 5-year ARM — or any kind of ARM whose introductory rate period is set to expire — can lock in a low fixed interest rate in today’s mortgage market and avoid the ARM loan’s rate changes.

You’ll have a wide variety of refinancing options which include:

  • Conventional Loans: These conforming loans are regulated by Freddie Mac and Fannie Mae, and must meet loan limits. Conventional loans have especially low rates if you’ve got great credit. If you have at least 20% equity at the time you refinance, you may be able to ditch PMI mortgage insurance. This would help lower your monthly payment
  • FHA Loans: Insured by the Federal Housing Authority, these mortgages can offer competitive fixed rates to homeowners. The FHA has a cash-out refinance option for borrowers with a credit score of at least 600, in most cases, and more than 20% equity in the home. You may have enough equity if you made a larger down payment or live in an area with fast-rising real estate values
  • VA Loans: Veterans and active duty military members can refinance with a loan backed by the Department of Veterans Affairs. With a VA loan, a homeowner can refinance up to 100% of the home’s value and take cash-out if they wish
  • USDA Loans: With backing from the U.S. Department of Agriculture, these loans are available to homeowners in rural areas. About 97% of the nation’s landmass falls within the USDA’s definition of “rural.” To qualify for USDA financing, you’d also need to meet income requirements, meaning you couldn’t earn more than 115% of your area’s median income

All of these types of mortgages offer fixed rates. USDA and VA loans often have the lowest interest rates, but not everyone can qualify.

All loan types except VA loans require the homeowner to pay mortgage insurance premiums. With a conventional loan you can avoid mortgage insurance when you retain 20% equity in the home.

With any refinance you’d need to pay closing costs, too.

What are today’s 5/1 and 15-year mortgage rates?

Rates for 5/1 ARMs and 15-year fixed loans often track each other fairly closely. Be sure and get quotes for both programs when you contact competing lenders for mortgage quotes.

Also remember that mortgage rates depend a lot on the home buyer.

Your credit score, debt-to-income ratio, loan term, and down payment will affect your actual rates with any kind of mortgage.

Mortgage interest rates also vary by lender. Many borrowers can save a lot simply by shopping around and finding the lender that can offer them the lowest interest rate and fees.


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