5/1 ARM

A 5/1 ARM is an adjustable-rate mortgage with a rate fixed for the first five years that then adjusts once a year for the rest of the term. It is one of the most common ARM structures on DSCR loans, often priced below the 30-year fixed rate.

The first number is the fixed period in years and the second is how often the rate changes after it. A 7/1 and a 10/1 work the same way with longer fixed periods. Some lenders quote a 5/6 ARM instead, which adjusts every six months after year five.

Investors often choose a 5/1 when they expect to sell or refinance within five years, since they collect the lower rate and leave before the first reset. That plan depends on rates and values cooperating. After five years of payments at 7.5%, the example loan still owes about $354,800, so a refinance at that point has to size a nearly full-size loan on the rent at whatever the rate is then.

Further reading: 5/1 ARM on Wikipedia.