5/6 Hybrid ARM: A Mortgage With Five Fixed Years and Semiannual Rate Resets

A 5/6 hybrid ARM is an adjustable-rate mortgage with a fixed interest rate for the first five years and rate adjustments every six months after that.

The 5 refers to the initial fixed-rate period. The 6 refers to the reset frequency after the fixed period ends.

Why It Matters

This mortgage structure can lower the starting interest rate compared with a fixed-rate loan, but it also pushes interest-rate risk into the future.

For borrowers who plan to move, refinance, or pay down the loan before the reset period, that tradeoff may be acceptable. For borrowers who will still hold the loan after year five, the semiannual reset schedule can materially change monthly payment risk.

How the Loan Works

A typical 5/6 hybrid ARM has these parts:

• an initial fixed rate for five years

• a later rate tied to an index plus a margin

• periodic and lifetime caps that limit how fast the rate can rise

After the fixed period ends, the lender recalculates the rate every six months using the loan’s formula. If market rates rise, the borrower’s payment may rise as well.

Example

Suppose a borrower starts with a 5/6 ARM at 5.25%.

• Years 1 through 5: the rate stays at 5.25%

• After year 5: the rate resets every six months based on the loan index and margin

If the fully indexed rate at the first reset is higher than 5.25%, the monthly payment will generally increase, subject to the loan’s cap rules.

Main Borrower Tradeoff

The appeal of a 5/6 ARM is the lower starting rate.

The risk is that the loan can become more expensive relatively quickly after the fixed period because the reset happens twice per year rather than once per year.

That makes it important to review:

• how long the borrower expects to keep the mortgage

• the loan’s Interest Rate Cap structure

• how much payment increase the household budget can absorb

Related Terms

• Adjustable-Rate Mortgage (ARM)

• Hybrid Adjustable-Rate Mortgage

• Interest Rate Cap

• 2/28 Adjustable-Rate Mortgage

Applicability

The 5/6 Hybrid ARM is suitable for borrowers who:

1. Seek lower initial payments.

2. Plan on moving or refinancing within a short period.

3. Are comfortable with potential interest rate fluctuations after the initial period.

FAQs

• What happens if I move before the adjustable period begins?

  Moving or refinancing before the adjustable period negates the risk of experiencing an increased rate.

• Are there caps on how much the interest rate can change?

  Yes, ARMs often have periodic caps and lifetime caps that limit the extent of rate changes.