What does a 5/1 adjustable-rate mortgage (ARM) indicate?

A 5/1 adjustable-rate mortgage (ARM) indicates that the interest rate is fixed for the first 5 years of the loan, which aligns with the rationale behind option B. After this initial fixed period, the interest rate adjusts annually based on the prevailing market conditions or a specified index. This structure offers borrowers the benefit of stable payments for the first five years, which can be advantageous for budgeting and planning financial commitments during that period.

The nature of ARMs allows borrowers to often secure a lower initial interest rate compared to fixed-rate mortgages, making option B particularly appealing to those who may intend to sell or refinance before the adjustable phase begins. While the loan does become adjustable after these five years, that detail is not what the question emphasizes, focusing instead on the fixed-rate period at the beginning. This understanding is crucial for individuals considering how an ARM might suit their financial situation over time.