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.

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.

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.