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5/6 Hybrid Adjustable-Rate Mortgage (ARM) Definition

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Updated July 26, 2023

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What Is a 5/6 Hybrid Adjustable-Rate Mortgage (ARM)?

A 5/6 hybrid adjustable-rate mortgage (ARM) has a fixed interest rate for the first five years, after which the interest rate can change every six months. A 5/6 hybrid adjustable-rate mortgage (ARM) combines the characteristics of a traditional fixed-rate mortgage with those of an adjustable-rate mortgage.

Key Takeaways

A 5/6 hybrid ARM has an interest rate fixed for the first five years, then adjusts every six months.
The adjustable interest rate on 5/6 hybrid ARMs is usually tied to a common benchmark index.
A risk associated with an adjustable interest rate is that a rising rate may make monthly payments unaffordable.

How a 5/6 Hybrid Adjustable-Rate Mortgage (ARM) Works

A 5/6 hybrid ARM starts with a fixed interest rate and then the interest rate becomes adjustable for the remaining years of the loan. The adjustable rate is based on a benchmark index, such as the prime rate.

The lender will also add additional percentage points, known as a margin. If the index is currently at 4% and the lender’s margin is 3%, then the fully indexed interest rate for the borrower will be 7%.

A 5/6 hybrid ARM should have caps on how much the interest rate can rise over the life of the loan. This offers protection against rising interest rates that could make the monthly mortgage payments unmanageable.

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How Are 5/6 Hybrid ARMs Indexed?

Lenders use different indexes to set interest rates on 5/6 hybrid ARMs. The U.S. prime rate and Constant Maturity Treasury (CMT) rate are commonly used. In a rising interest-rate environment, the longer the period between interest-rate reset dates, the better it will be for the borrower. A 5/1 hybrid ARM would be better than a 5/6 ARM because its interest rate would not rise as quickly. The opposite would be true in a falling interest-rate environment.

5/6 Hybrid ARM vs. Fixed-Rate Mortgage

Advantages of a 5/6 Hybrid ARM

Many adjustable-rate mortgages, including 5/6 hybrid ARMs, start with lower interest rates than fixed-rate mortgages, providing the borrower with a significant savings advantage, especially if they expect to sell the home or refinance their mortgage before the fixed-rate period of the ARM ends. Borrowers should ensure that the lender doesn’t impose costly prepayment penalties for getting out of the mortgage early.

Disadvantages of a 5/6 Hybrid ARM

The 5/6 hybrid ARM comes with interest rate risk. Because the interest rate can increase every six months after the first five years, the monthly payments may become unaffordable for the borrower. With a fixed-rate mortgage, the interest rate will never rise. The interest rate risk is mitigated if the 5/6 hybrid ARM has periodic and lifetime caps on any interest rate increases.

What Is an Adjustable Rate Mortgage?

An adjustable-rate mortgage (ARM) is a home loan with a variable interest rate. With an ARM, the initial interest rate is fixed for a period. After that, the interest rate applied on the outstanding balance resets periodically, at yearly or even monthly intervals.

How Is the Interest Rate on a 5/6 ARM Determined?

The lender will set the five-year fixed rate based on creditworthiness and the prevailing interest rates. When the adjustable rate kicks in after five years, it will be based on a benchmark index, such as the prime rate, plus an additional percentage added by the lender, known as the margin.

Does Anything Prevent Interest Rates from Rising Too High on a 5/6 ARM?

Many 5/6 hybrid ARMs and other types of ARMs have caps that limit how much rates can rise in any given period and in total over the life of the loan.

The Bottom Line

A 5/6 hybrid adjustable-rate mortgage has a fixed interest rate for the first five years, and then the rate adjusts every six months. The rate is commonly linked to a benchmark index, such as the prime rate.

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