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A 10-year adjustable-rate mortgage offers a fixed rate for the first 10 years of the loan. After that, the interest rate resets every six months. Many homeowners opt to refinance or sell their property before the rate starts to change. So why bother with an adjustable-rate mortgage at all?.
Well, because during that initial fixed-rate period, ARMs often offer significantly lower interest rates than fixed-rate mortgages. With a 10-year ARM, thats a decades worth of a teaser rate. Heres what to consider if youre thinking about a 10-year adjustable-rate mortgage.
What is a 10-year ARM?
A home loan that has a fixed interest rate for the first ten years of the mortgage term and an adjustable rate for the final twenty years is known as a 10-year ARM, or adjustable-rate mortgage. Borrowers who wish to benefit from possibly lower initial interest rates in comparison to conventional 30-year fixed-rate mortgages may find this hybrid approach appealing.
How does a 10-year ARM work?
During the initial 10-year period, your interest rate and monthly payments remain fixed. However after 10 years the interest rate becomes adjustable, meaning it can fluctuate based on prevailing market conditions. This adjustment typically occurs annually, and the new rate is determined by adding a margin to a reference index, such as the Secured Overnight Financing Rate (SOFR).
Pros and Cons of a 10-year ARM
Pros:
- Lower initial interest rates: Compared to fixed-rate mortgages, 10-year ARMs often come with lower initial interest rates, potentially saving you money on your monthly payments during the first decade of the loan.
- Flexibility: If you plan to sell your home within the first 10 years, you can benefit from the lower initial rate without being locked into the adjustable rate period.
- Potential for lower rates in the future: If market interest rates decline, your adjustable rate could also decrease, leading to lower monthly payments in the future.
Cons:
- Uncertainty of future rates: The adjustable nature of the rate means that your monthly payments could increase if market interest rates rise. This can make budgeting more challenging.
- Potential for negative equity: If home values decline and your adjustable rate increases, you could end up owing more on your mortgage than your home is worth.
- Complexity: Understanding the terms of a 10-year ARM, including the margin, index, and adjustment frequency, can be more complex than a fixed-rate mortgage.
Is a 10-year ARM right for you?
A 10-year ARM’s suitability for you will depend on your unique financial situation and objectives. Consider the following factors:
- Your financial stability: If you have a stable income and are confident in your ability to manage potential increases in your monthly payments, a 10-year ARM could be a viable option.
- Your plans for the future: If you plan to stay in your home for more than 10 years, the potential for higher interest rates in the future could outweigh the initial savings.
- Your risk tolerance: If you are comfortable with the possibility of fluctuating interest rates, a 10-year ARM might be a good fit. However, if you prefer predictability and stability, a fixed-rate mortgage might be a better choice.
Comparing a 10-year ARM to other mortgage options:
- 30-year fixed-rate mortgage: Offers a fixed interest rate for the entire 30-year term, providing stability and predictability. However, the initial interest rate is typically higher than that of a 10-year ARM.
- 5-year ARM: Similar to a 10-year ARM, but the initial fixed-rate period is shorter, lasting only five years. This can result in even lower initial interest rates, but the risk of rate increases after five years is higher.
Making an informed decision:
It’s important to carefully consider your financial situation, risk tolerance, and future plans before selecting a 10-year ARM. You can ascertain whether the terms and conditions of the loan are in line with your financial objectives by speaking with a mortgage professional.
Additional Resources:
- Bankrate: What is a 10/1 adjustable-rate mortgage (ARM)?
- NerdWallet: What Is a 10-Year ARM?
Remember:
- A 10-year ARM can be a good option for borrowers who want to take advantage of potentially lower initial interest rates and have the flexibility to sell their home within the first 10 years.
- Carefully consider your financial situation and risk tolerance before choosing a 10-year ARM.
- Consult with a mortgage professional to understand the terms and conditions of the loan and determine if it’s the right choice for you.
How does a 10-year adjustable-rate mortgage work?
Given that it has a fixed rate period of 10 years prior to the rate starting to adjust, a 10-year adjustable-rate mortgage is considered a hybrid mortgage. Similar to fixed-rate mortgages, 10-year ARMs typically have a 20-year adjustable-rate period. This is because 30-year loan terms are common.
Your 10-year ARM’s interest rate will fluctuate during that adjustable period in accordance with the current mortgage interest rates. The index, which is subject to fluctuations, and the margin, which is a fixed base rate, combine to form ARM interest rates. Lenders add the index to the margin to determine adjustable mortgage rates.
When examining 10-year adjustable mortgages (ARMs), you will notice that lenders provide varying terms for the loan in addition to varying interest rates. Its not as if anything can happen once the introductory period is up. Instead, there are caps that show you how much your interest rate might change. These are often presented as sets of three numbers, like 2/2/5. These represent the three caps.
- Initial cap. When your interest rate adjusts for the first time, the first figure indicates the maximum amount it could go. Since it’s a 2, the first adjustment in the 2/2/5 example cannot be greater than 2 percentage points. In the event that you began with an interest rate of 4%, the maximum interest rate at which you could make an adjustment would be 6%.
- Subsequent/periodic cap. This cap goes by several names, but the middle figure shows how much your interest rate can fluctuate each time it resets following the initial adjustment. With a 2/2/5 ARM, your rate may increase by up to 2 percentage points every six months. Using the example again, let’s say you are at%206%%20%E2%80%94%20the%20highest%20you%20can%20go%20from, which is%208%
- Lifetime cap. The final figure shows you the maximum amount that your interest rate can increase from the starting rate. Five percentage points are pretty common. Using our %202/2/5%20ad example, if you had started with a 4% introductory rate, your lifetime cap would have been 9%.
Understanding these various caps will help you anticipate potential outcomes should you decide to keep your 10-year ARM after the initial 10-year period. Additionally, you can request that adjustable-rate mortgage lenders calculate your potential mortgage payment at various interest rates and provide you with the actual amounts.
Depending on prevailing rates, your interest rate also could adjust downward. As a result, ARM borrowers in the adjustable period may actually benefit from a declining interest rate environment since they won’t need to refinance. However, if interest rates are declining, lenders might establish a floor that caps how much your rate can drop.
If youre looking for a 10/1 ARM, you might not find one. The benchmark interest rate used to calculate adjustable mortgage rates shifted from Libor to SOFR in 2020 and 2021. From a borrowers perspective, the biggest difference is that SOFR ARMs adjust twice a year. Thats why youll sometimes see /6, indicating the rate adjusts every six months following the introductory term. The previous index fluctuated less, so Libor ARMs only reset once a year — that was the /1.
What are the disadvantages of a 10-year ARM?
Adjustable-rate mortgages, including the 10-year ARM, arent a fit for every home buyer. Here are some of the drawbacks of 10-year ARMs.
Less predictability. You are unsure of the precise amount of your monthly mortgage payment after the introductory period ends, even with knowledge of the caps and the floor. If your budget isn’t able to handle the rate increases, you may have decided during those ten years that you absolutely love the house and don’t want to move.
Expensive to leave. If youre planning to move anyway, no big deal. Refinancing costs must be taken into account if you need to switch to a new adjustable rate mortgage (ARM) or a fixed-rate loan. The closing costs for a refinance can range from 2% to 5% of the loan costs, which could potentially cancel out the savings from your introductory rate.
Higher introductory rates than 5-year ARMs. Even though an ARM with a 10-year term should still have a lower introductory rate than a fixed-rate mortgage, the difference won’t be as great as it would be if the ARM had a shorter introductory period. A 5-year adjustable-rate mortgage will often get you the lowest introductory rate. The rates on 10-year ARMs may not be significantly cheaper than those on certain fixed-rate loan options, depending on the lender and the state of the interest rate market.
Fixed vs ARM Mortgage: How Do They Compare? | NerdWallet
FAQ
What does a 10-year ARM mean?
What is the risk of a 10-year ARM?
How does a 10-year mortgage work?
How do you qualify for a 10 1 ARM?
What is the difference between a 10/1 & 10/6 arm?
With a 10/1 or 10/6 ARM, you’ll have a fluctuating interest rate after a set introductory period, while with a 30-year fixed-rate mortgage, the rate never changes. For their first decade, the ARMs offer a lower interest rate than the 30-year fixed-rate mortgage.
What is a 10/1 arm mortgage?
A 10/1 ARM is a hybrid mortgage – that is, a mortgage with both a fixed period and a variable period. For the first 10 years, the borrower pays the same interest rate on the loan. After that, the rate can fall or rise, depending on the general interest-rate trends. ARM interest rates are composed of two parts.
Is a 10/1 arm right for You?
Whether a 10/1 ARM is right for you largely depends on the initial interest rate you can negotiate, and how long you plan to stay in your house. Interest rates for 10/1 ARMs are generally lower than fixed-rate mortgages’, because your lender can adjust your interest rate after the first 10 years.
What is a 10 year arm?
A 10-year ARM represents the length of time that your initial interest rate stays the same. In this case, your ARM stays the same for the first 10 years. After 10 years, you enter into an adjustment period and your interest rate can increase or decrease based on the current index rate and the terms of your loan.