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

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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)](https://www.investopedia.com/terms/a/arm.asp) combines the characteristics of a traditional [fixed-rate mortgage](https://www.investopedia.com/terms/f/fixed-rate_mortgage.asp) 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](https://www.investopedia.com/terms/p/primerate.asp).

The lender will also add additional percentage points, known as a [margin](https://www.investopedia.com/terms/a/armmargin.asp). If the index is currently at 4% and the lender’s margin is 3%, then the [fully indexed interest rate](https://www.investopedia.com/terms/f/fullyindexedinterestrate.asp) for the borrower will be 7%.

A 5/6 hybrid ARM should have [caps](https://www.investopedia.com/terms/p/periodiccap.asp) 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.

> **Tip**
>
> Discover how to find the best mortgage for you.

## 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](https://www.investopedia.com/terms/p/primerate.asp) and [Constant Maturity Treasury (CMT)](https://www.investopedia.com/terms/c/constantmaturity.asp) 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](https://www.investopedia.com/terms/1/5-1_arm.asp) 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](https://www.investopedia.com/mortgage/refinance/when-and-when-not-to-refinance-mortgage/) their mortgage before the fixed-rate period of the ARM ends. Borrowers should ensure that the lender doesn’t impose costly [prepayment penalties](https://www.investopedia.com/terms/p/prepaymentpenalty.asp) for getting out of the mortgage early.

### Disadvantages of a 5/6 Hybrid ARM

The 5/6 hybrid ARM comes with [interest rate risk](https://www.investopedia.com/terms/i/interestraterisk.asp). 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](https://www.investopedia.com/terms/v/variableinterestrate.asp). 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](https://www.investopedia.com/terms/c/credit-worthiness.asp) 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.

> **Article Sources**
>
> 1.  Consumer Financial Protection Bureau. “[Consumer Handbook on Adjustable-Rate Mortgages](https://files.consumerfinance.gov/f/documents/cfpb_charm_booklet.pdf),” Page 4.