What does the term "5/1 ARM" mean in mortgage lending?
Correct Answer
B) A loan with a fixed interest rate for the first 5 years, then adjusts once every 1 year thereafter
A 5/1 ARM (Adjustable-Rate Mortgage) has a fixed interest rate for the first 5 years of the loan term. After that initial fixed period, the rate adjusts once per year (the "1") based on a specified market index plus a lender's margin. ARMs typically offer lower initial interest rates than fixed-rate loans, making them attractive to borrowers who plan to sell or refinance before the adjustment period begins, but they carry the risk of rate increases over time.
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