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

Michele Lerner
Michele Lerner
The Mortgage Reports Contributor
September 23, 2022 - 10 min read

5/1 ARM rates vs. 15-year mortgage rates

On average, 5/1 ARM rates are substantially lower than 30-year fixed mortgage rates. 5/1 ARM rates are usually lower than 15-year fixed rates, too, but by a smaller margin (often 0.5% or less).

Remember that your rate can be higher or lower than average based on your credit score, 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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5/1 ARM vs. 15-year fixed-rate mortgage

Adjustable mortgage rates are typically lower than fixed mortgage rates — but only during their initial, introductory period.

When you use a 5/1 ARM, your ultra-low intro rate is fixed for the first five years. After that, your rate and payment can adjust once per year over the remaining 25 years of the loan term (or until you sell or refinance). A 15-year fixed-rate mortgage, on the other hand, fixes your interest rate and payment for the entire life of the loan.

A 5/1 ARM may be a better idea than a 15-year fixed loan if you plan to move or refinance within five years. That way, you can enjoy a lower rate and payment during the ARM’s intro period and get out of your mortgage before it ever adjusts. But if you’re planning to stay in your home for the long term, a 15-year fixed-rate loan may be a better choice thanks to the financial security it offers.

Another way to look at it is that 5/1 ARMs offer short-term savings while 15-year FRMs offer long-term savings. A 5/1 ARM can lower your rate and monthly payment at the outset — potentially helping you afford a home in this pricey market — while a 15-year fixed loan has higher payments but greater savings in the long run.

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 FRMs are available at similar or lower rates. But when ARM rates are much lower than fixed rates, a 5/1 ARM starts to look a lot more attractive.

ARM pros

  • Lower intro rates and payments. The advantage of a 5/1 ARM is that during the first years of the loan — when the upfront rate is fixed — you can 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 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, for example

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

ARM cons

The biggest disadvantage of an ARM is the risk of interest rate hikes. For example, it’s possible a 5/1 ARM with a 4.5% start rate could (worst case) increase as follows:

  • Beginning of year six: 6.5%
  • Starting year seven: 8.5%
  • Years eight through 30: 9.5%

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

In addition, modern adjustable-rate mortgages come with interest rate caps that limit the amount your rate can increase at each adjustment and over the life of the loan. And lenders often qualify borrowers for ARMs based on the maximum possible rate to ensure the loan would remain affordable even if their rate were to increase.

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

A 5/1 ARM isn’t the only way to secure a below-market mortgage rate. Home buyers can also opt for a 15-year fixed-rate mortgage. Today’s 15-year fixed mortgage rates are about a half percentage point higher than 5/1 ARM rates on average. But they’re nearly a full percentage point lower than 30-year fixed rates.

The catch? A 15-year FRM gives you half as much time to pay off your loan balance as a 30-year fixed loan or a 5/1 ARM (which has a total loan term of 30 years). That means your monthly payments will be higher. But while your loan gets paid off 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 were 5.89% for a 30-year FRM and 5.16% for a 15-year FRM. Let’s take a look at how the monthly principal and interest payments would compare for a $300,000 loan amount.

  • 30-year FRM: $1,780/month
  • 15-year FRM: $2,400/month

In this scenario, a 15-year fixed-rate loan costs an extra $620 per month compared to a 30-year fixed loan. But you’d save nearly $210,000 in total interest over the life of the loan. In this way, a 15-year fixed-rate mortgage can offer substantial interest savings but without the added risk of adjustable rates and payments.

How to choose between a 5/1 ARM vs. a 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 ARM interest rates are lower than fixed rates. Keep in mind that if your ultimate goal is to pay off the loan quickly, you always have the option of making a higher monthly payment when you want to and can afford it. But you’re not locked into the higher payment like you would be with a 15-year fixed-rate mortgage.

“If you want to pay off your loan faster and can afford the higher payment, then a 15-year fixed loan is probably the right option for you.”

–Jon Meyer, The Mortgage Reports loan expert and licensed MLO

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

When rates are low across the board, there tends to be a smaller difference or “spread” between adjustable rates and fixed rates. So there’s less to gain by choosing an adjustable rate loan. Why choose an ARM when you could lock in an almost equally low rate for the full loan term?

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 for a few years. (Thus, they may benefit from the low fixed-rate period and move before their rate changes.)

How does a 5/1 ARM work?

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. “It’s important to stress the change in rate. A lot of people only hear the ‘pay less’ part, and ignore that the savings are only for the first five years,” reminds Meyer.

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

  • The index rate (a published financial indicator) on which your ARM 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 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. 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 (London Interbank Offered Rate) or the Constant Maturity Treasury (CMT) securities index. But as of 2021, the majority of ARMs are based on the Secured Overnight Financing Rate (SOFR) index instead.

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 is 2.5%, but you are nearing the end of your 5-year fixed period. The current SOFR overnight financing rate is at 0.10 percent. The margin on your loan is 2.75% (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.

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 ARM 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% percent. And over the life of the loan, the rate can never exceed 8 percent.

When to refinance out of an ARM

Recently, mortgage rates have been on the rise. If you currently have an ARM and its rate is about to adjust, you might consider refinancing into a fixed-rate mortgage to lock in your rate and payment and avoid further rate hikes down the road.

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 to get estimates for both programs when you contact lenders for mortgage quotes.

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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