10/1 ARM: Definition And Today’s Rates

You’re ready to buy a home, but like most people, you need to finance the purchase with a mortgage. You have plenty of options when looking for a loan, and one that might work depending on your financial situation is a 10/1 ARM. While Rocket Mortgage^® doesn’t offer 10/1 ARMs, we do offer 10/6 ARMs. We’ll go over everything you need to know to select the best option for you.

What Is A 10/1 ARM?

The 10/1 ARM is an adjustable-rate mortgage, one in which your rate remains the same for a set period of time before adjusting to a new rate on a predetermined schedule. With the 10/1 ARM, your rate remains the same for the first 10 years of your loan. After the fixed period ends, your rate will adjust once a year for the remaining loan term.

We offer 10/6 ARMs on conventional loans. The rate stays fixed for 10 years and adjust every 6 months afterwards until the loan is paid off.

If you don’t plan on living in your home for more than 10 years, a 10/1 or 10/6 ARM might be right for you.

How Does A 10-Year ARM Work?

When you’re searching for a mortgage loan, you can choose either a fixed-rate loan – a mortgage in which your interest rate never changes – or an adjustable-rate mortgage, where your interest rate will change after a set amount of time. A 10/1 ARM or 10/6 ARM belongs to the adjustable-rate family of home loans, but you can think of it as a combination of a variable-rate and fixed-rate mortgage.

Adjustable-rate mortgages typically start with an interest rate lower than what you’d get with a standard fixed-rate loan. That rate, though, only remains at this level for a set number of years. After those years pass, the interest rate on an adjustable-rate mortgage, or ARM, rises or falls according to a an index level.

With the 10/1 ARM, your interest rate will remain fixed for 10 years. It will then adjust once a year for the remaining life of the loan. If you take out a 30-year 10/1 ARM, your rate will remain fixed for 10 years and then adjust once a year for the remaining 20 years. With a 15-year 10/1 ARM, your rate again remains fixed for the first 10 years before the adjustable-rate period sets in for the final 5 years. Most ARM loans have 30-year terms.

The only difference with a 10/6 ARM is that the adjustment interval is every 6 months after 10 years.

Because the interest rate on a 10/1 ARM will be low during the first 10 years, this is a good choice if you know you don’t want to live in your new home for more than 10 years.

If you plan on living in your home for longer than 10 years, be careful. There are a specific set of risks associated with ARMs. Your interest rate could rise each year after the fixed period. That means your mortgage payment will increase during this time, too. Make sure you can afford any possible increases.

10/1 ARM Loan Basics

A 10/1 ARM might seem complicated. But these products are relatively simple once you get the basics.

Interest Rates

Borrowers turn to ARMs because the initial interest rates that come with these loans are generally lower than what buyers can get from standard fixed-rate loans. Of course, the fixed period doesn’t last forever. After that initial period ends, the low rates on these loans adjust, usually increasing.

With a 10/1 ARM, your interest rate will remain fixed for 10 years and will then adjust once every year until you pay off your loan, sell your home or refinance your mortgage. What your rate adjusts to will depend on whatever market conditions and economic index it is tied to.

ARM interest rates may be tied to the prime rate that banks charge when issuing loans to home buyers with the strongest credit. The interest rates on other ARMs might be tied to LIBOR, which stands for London Interbank Offered Rate. This interest rate is what banks charge each other for the overseas deposits of U.S. dollars.

This isn’t the only economic index that guides the direction of ARM interest rates, though. Be sure to ask your lender or loan officer which index they use when you apply for an ARM.

Monthly Payments 

When your rate adjustment happens, your monthly mortgage payment will change, too. If your interest rate increases, your monthly payment will rise too. If it adjusts down, your payment will decrease.

Many financial calculators, like our mortgage calculator, can help you figure out your fixed-rate monthly payment compared to possible adjusted monthly payments. This process can give you a rough idea of how much your interest rate can affect your payment amount.

Make sure you can afford a higher monthly mortgage payment if you plan on staying in your home longer than 10 years. Your mortgage lender will also take the possibility of upward adjustments into account when you qualify.

Adjustment Interval

Most ARMs, including 10/1 ARMs and 5/1 ARMs, come with caps on how much interest rates can rise during their adjustment periods. These caps can vary, though.

Say your 10/1 ARM comes with what is known as a 5/2/5 cap. Once your ARM enters the adjustment period, your interest rate can increase by a maximum of 5 percentage points. That's what the first number 5 in the 5/2/5 cap arrangement stands for.

Every year after this, your interest rate can adjust a maximum of 2 percentage points. That is where the 2 in the interest rate cap arrangement comes from.

Finally, that last 5 means that your interest rate during the life of your loan can never adjust higher than 5 total percentage points from your initial rate.

10/1 ARM FAQs

As with any mortgage loan, there are both pros and cons to 10/1 ARMs. These also apply to 10/6 ARMs. Below are some common questions you should consider before choosing an adjustable-rate mortgage.

What are the advantages of a 10/1 ARM?

There are few reasons why 10/1 ARMs are so attractive to prospective borrowers. Some of the best advantages are:

• Lower initial interest rates: The biggest benefit of a 10/1 ARM is the lower initial interest rate you’ll receive during the fixed period. These rates are typically lower than what you’d get with a 30-year, fixed-rate loan. As of 2021, and depending on your credit score, it’s possible to get a 10/6 ARM, a close relative to a 10/1 ARM, with an interest rate well under 3%, if you’re willing to pay a few points in mortgage interest up front.
• Longer fixed-rate periods: Unlike other ARMs, the 10/1 ARM comes with a longer fixed-rate period. Many other ARMs come with shorter fixed-rate periods, like a 7/1 ARM or its 7/6 ARM cousin. The longer fixed period gives homeowners more time to hold onto the mortgage before the rate begins adjusting.

What are the disadvantages of a 10/1 ARM?

While ARMs can come with lower initial interest rates and a reasonable fixed-rate period, there are also drawbacks to think about, like:

• Rate uncertainty: With a fixed-rate loan, you know exactly what your interest rate will be throughout the life of your loan. ARMs – even one with a longer fixed period, such as a 10/1 ARM – are different. After the fixed period ends, your rate will adjust. This change could mean a higher mortgage payment if your rate rises. You need to be prepared for that uncertainty.
• The pressure to sell or refinance: Many homeowners take out ARMs with the goal of either selling their home or refinancing to a fixed-rate mortgage before the fixed period of their ARMs expire. That’s a good plan, but it might not always work. You might try to sell your home but not find any good offers. You might want to refinance, but maybe your income levels have dropped, and you can’t get approved, or maybe you don’t have enough equity in your home to close a refinance. When taking out a 10/1 or 10/6 ARM, you need to be prepared in case your plans to sell or refinance fall through.

Where can you find today's 10/1 ARM rates?

There are plenty of places to find current mortgage interest rates, such as the Freddie Mac Primary Mortgage Market Survey, which updates them once a week.

However, this and other sources don’t usually list the specific average interest rate for 10/1 ARMs. If you want those current rates, your best bet is to speak with a mortgage expert for a quote based on your credit and financial information. You can also contact us for information on a 10/6 ARM.

The Bottom Line: Should You Get A 10/1 ARM?

A 10/1 ARM makes the most sense if you plan to sell your home or refinance your mortgage before the 10-year fixed period ends. If you do this, you can take advantage of the low initial interest rate that comes with an ARM without worrying about your rate rising once the fixed period ends.

You’ll need a risk tolerance, though. Even if you plan to sell or refinance before the fixed period ends, there’s no guarantee that you’ll be able to accomplish these tasks before your rate enters its adjustment phase.

Although we don’t offer 10/1 ARMs, a 10/6 ARMs could help you accomplish the same goals. If you are interested in learning more about 10/1 ARMs or any other real estate loan options, talk to a Home Loan Expert at Rocket Mortgage today.