The 5/1 Libor Adjustable Rate Mortgage (ARM) will be fixed for five years and then the interest rate will adjust once per year. This can be a good loan for someone that plans to move or refinance within 5 years, or would like to have a lower payment to qualify for a larger home.

Today's market is a fixed rate market for most folks. However, if you are puchasing a starter home and plan on moving up to a larger home within 5 years a 5/1 Libor ARM loan could offer you some savings. You could invest the difference in payments or have more discretionary income.

If you decide to go with a 5/1 Libor ARM loan, make sure you understand the terms of the loan. The first number is a 5, which means that the initial rate will be fixed for 5 years. The second number in the loan program is a 1, which usually means that the rate will adjust 1 time per year after the first 5 year fixed rate period. There are also items such as rate caps that you need to be aware of along with prepayment penalties.

Unless you know for sure that you will be relocating or refinancing within 5 years the 5/1 ARM is a risky loan to enter into right now. If you want a lower payment that the 5/1 ARM offers ask your mortgage broker about a 30 year fixed interest only. Yo will get the low payment of the 5/1 ARM with the stability of a fixed rate mortgage.

A benefit of the 5/1 LIBOR ARM is that it can help you qualify for a larger loan. With lower monthly payments compared to long term fixed loans, your Debt to Income ratio can be lower and therefore help you qualify for a more desirable home and larger loan than you would normally.