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What Is a 10/1 ARM and How Does It Work?


What You Need To Know

  • A 10/1 ARM loan has a fixed rate for the first 10 years of the loan and will have variable rates for the remainder of the loan
  • 10/1 ARM loans often have lower interest rates than fixed-rate mortgages during fixed-rate periods but can have costly payments later on
  • Lenders adjust 10/1 ARM variable rates and mortgage payments on an annual basis using market index and margin calculations


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Whether you’re buying your first home or already have some experience as a homeowner, no mortgage experience is quite the same. With such a variety of mortgages to pick from, each with its own type, terms and rates, it’s no surprise that shopping for one can be an overwhelming process.

A 10-year adjustable-rate mortgage (10/1 ARM) can be an advantageous choice for certain buyers compared with a fixed-rate loan. We’ve put together a guide to 10/1 ARMs and tips and considerations to help you see if it’s the right mortgage for your financing needs.

Adjustable-Rate Mortgage Definition

The two main types of mortgages you’ll find are either fixed-rate or adjustable-rate mortgages (ARM). While fixed-rate mortgages have the same interest rate set over the course of the loan, adjustable or variable-rate mortgages typically start at a fixed rate below current market rates but increase or decrease over time. 

This initial rate is sometimes called a teaser rate because it’s lower than interest rates you’ll find for fixed-rate mortgages. The big gotcha here is that once the teaser rate term is complete, the rate jumps up significantly.

With adjustable-rate mortgages, the interest rate changes periodically. The change can happen each year, every 6 months, or every 2, 3 or 5 years, depending on the loan terms. When the rate adjusts, the monthly payment gets recalculated.

A 10/1 ARM falls into the adjustable-rate mortgage category. This type of mortgage has a fixed interest rate for the first 10 years and then switches to an adjustable interest rate for the rest of the loan term. 

These 10/1 ARMs are among the most popular types of loans, but you can also find ARMs with different terms, like 5/1 ARMs or 10/6 ARMs.

How a 10/1 ARM Works 

So, you get how adjustable-rate mortgages work now, but what do the numbers in the term “10/1 ARM” indicate? The first number tells you how many years the interest rate will remain fixed at the introductory rate, and the second number shows how often that rate adjusts. Let’s check out some examples:

  • A 5/1 ARM has a fixed rate for 5 years and rates adjust annually after that. 
  • A 5/6 ARM has a fixed rate for 5 years and rates adjust every 6 months after that.
  • With a 10/1 ARM, you’ll usually have a 15- or 30-year term. After the first 10 years at a fixed rate, interest rates will change every year for the rest of your loan term. 

That also means that when interest rates change each year, your monthly payment adjusts accordingly.

So who figures all that out and how do they do it? 

To determine your variable interest rate each year, lenders look at the federal interest rate benchmarks and the real estate market. They add the current market rate and margin amount, resulting in your mortgage rate and payment for that year.

Lenders want you to keep making your payments through all this change, so they protect you with interest rate caps to keep your mortgage payments from getting too costly. The most common caps apply to different periods of the loan term:

  • Initial adjustment: The first interest rate adjustment that happens at the end of the fixed term.
  • Subsequent adjustment: The maximum adjustment allowed each year during the years after the initial adjustment.
  • Lifetime: The total lifetime cap based on your initial rate.

Let’s dive into what that means and how it works. The 2/2/5 cap is one of the more common caps, with each number representing the initial, subsequent and lifetime caps. 

  • The first 2 means your initial adjustment can’t be more than 2% more than your initial rate.
  • The second 2 means subsequent adjustments can’t exceed 2% of the previous rate.
  • The 5 is the lifetime cap, meaning that your interest rate may never exceed more than 5% of your initial rate.

To help better understand your interest rates, you’ll first need to know what your monthly mortgage costs are. Use our mortgage calculator to help understand what your 10/1 ARM interest rate will be.

Mortgage Calculator

10/1 ARM vs. Fixed-Rate Mortgages 

The main differences between a 10/1 ARM and a fixed-rate mortgage are in the names of these loans. Fixed-rate mortgages have an interest rate that is fixed, or doesn’t change, through the entire term of the loan until the loan is paid off. ARMs have an initial term with an interest rate that doesn’t change followed by a term with interest rates that vary, or adjust, until the mortgage is paid off.

Fixed-rate mortgages tend to have a straightforward repayment and amortization schedule. ARMs are subject to market index averages for each adjustment, making it more difficult to predict your payments after the fixed-rate term is over.

Borrowers tend to favor the amortized and surprise-free payments that come with 15- and 30-year mortgages. These fixed-rate mortgages have unchanging interest rates, making it easier for borrowers to plan and budget for repayment. Fixed rates are especially advantageous during fluctuating markets, especially if you’re able to lock in a low rate.

But if mortgage interest rates are trending higher, a 10/1 ARM might be a better way to get a lower interest rate and save more money over the lifetime of your loan than you would with a fixed-rate mortgage.

How is a 10/1 ARM different from a 15-year and 30-year mortgage? 

Let’s say you’re looking to borrow $300,000 for your mortgage. Your options are:

  • 10/1 ARM with 2.5% APR (interest rate combined with fees) and 2/2/5 rate cap over 30 years
  • 15-year fixed-rate at 3.2% APR
  • 30-year fixed-rate at 4% APR

With a 10/1 ARM, your initial monthly payments would only be about $1,185.36, but you could pay up to $1,779.99 per month if interest rates max out under the 2/2/5 cap during the variable term. 

At the upper end of the rate caps, you might pay as much as $263,585 in interest alone for the remainder of the 30-year term. Keep in mind that historically speaking, a 2.5% APR is a relatively low rate.

This isn’t too different from a 30-year fixed-rate mortgage, where your amortized payments would work out to about $1,297.40. You’d also pay $247,220 in interest overall, but you could reduce this amount with extra payments throughout the mortgage.

A 15-year fixed-rate mortgage guarantees much lower overall interest paid at only $78,130. However, it comes with a monthly payment around $2,100.72, which might not be affordable for many borrowers.

Pros and Cons of a 10/1 ARM 

As with fixed-rate mortgages, all ARMs come with pros and cons. Check out some pros of a 10/1 ARM:

  • Lower initial interest rates: You’ll get a lower initial interest rate than you would with a fixed mortgage rate, especially if the market has upward-trending rates.
  • Savings on interest: If rates remain low after the fixed-rate term, you might pay less interest than you would with a fixed-rate mortgage. You can also make extra principal payments during the initial term to lower interest fees later on.
  • Longer fixed-rate period than other ARMs: 5/1 and 7/1 ARMs are relatively common, but 10/1 ARMs grant the advantage of a longer fixed-rate period. This is especially beneficial if you’re planning to sell the property within 10 years.

10/1 ARMs aren’t perfect, though. Now let’s look at some of the cons:

  • Higher variable rates: Even with a rate cap to keep monthly payments from surging too high, you won’t be able to predict what the rates will be after the fixed-rate term is over, and may end up with really pricey monthly payments.
  • Time crunch: Some borrowers take on a 10/1 ARM if they’re planning to sell again. This can be a problem if the real estate market doesn’t favor sellers at the right time or if the borrower’s financial situation changes and their payments become more of a problem.

What To Consider Before Getting a 10/1 ARM

Although 10/1 ARMs may be tempting because they potentially offer savings and other benefits, you probably need a bit more information before you jump in. We’ve gathered some of the most common questions about 10/1 ARMs to guide you when you’re deciding which mortgage is right for you. 

How do 10/1 ARM mortgage rates compare to fixed mortgage rates?

The value of a 10/1 ARM interest rate depends largely on the overall rate difference with fixed-rate mortgages. Sometimes, the difference between the two isn’t significant enough to justify the variable period later on. 

In some cases, you could pay more on interest with a 10/1 ARM after the rates adjust than you would with a 30-year fixed-rate mortgage, even if you get to enjoy lower payments earlier on.

Can you pay off a 10/1 ARM early? 

You can sometimes pay off a 10/1 ARM early by taking advantage of the fixed-rate period. While you’re paying lower interest, you can put extra cash toward the principal amount. That way, variable interest rates later on are based on a lower principal amount, which would bring your monthly payments down. 

Even contributing an extra $50 per month or making biweekly payments can make a major impact on how much interest you pay in the end.

Keep in mind that some mortgage agreements include penalties for over or early payment. If these penalties are steep enough, it might not be worth making the extra payments. Make sure you understand the conditions of your mortgage before making any extra payments.

How long do you plan on owning the property?

If you plan to own your property for less than 10 years, a 10/1 ARM might be a great savings choice for you. If you can sell before the variable period starts, your payments will have put less money toward interest and more money toward principal. 

This strategy lets you build equity in the home over a relatively long period of time, but keeps your costs lower.

Can you refinance with a 10/1 ARM?

Can’t resell before the interest hike? Don’t worry – you have another option. You can refinance your 10/1 ARM after the fixed-rate period ends. If you can get a lower fixed-rate mortgage, that will give you net savings and guarantee lower payments and reduced interest over the lifetime of your loan. But don’t forget to factor closing costs into the cost/savings equation.

Basically, you’re taking advantage of two popular types of loans by using market index opportunities.

Wrapping It Up – Is a 10/1 ARM Loan Right For Me?

If you plan to sell or refinance your home within the first 10 years you own it, a 10/1 ARM loan might be the perfect choice for you. If you’re able to make extra payments or can handle variable payments later on, a 10/1 ARM loan can save you major money, even if you stay in your home longer than 10 years. 

Keep in mind that this loan comes with more risk-tolerance requirements than a 15- or 30-year fixed-rate mortgage. If you are currently shopping for mortgages, remember that lenders are looking at your credit history and financial health. Great credit can help you get the best rates regardless of which mortgage you choose.

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In Case You Missed It

  1. Depending on rate fluctuations, you might have cheap or expensive mortgage payments during the variable period of your 10/1 ARM

  2. 10/1 ARMs can be a strategic choice if you’re not planning to own your home longer than 10 years

  3. You can reduce maximum payment amounts during the variable period by making extra payments during the fixed-rate period

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