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What is a 10/1 adjustable-rate mortgage (ARM)?

What is a 10/1 ARM
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What is a 10/1 ARM?

A 10/1 ARM refers to a 30-year adjustable-rate mortgage. The 10/1 denotes the length of the fixed part of the mortgage — in this case, fixed for the first 10 years, then the interest rate adjusts once yearly after that, depending on the formula stated in the loan agreement. A twist to this is the 10/6 ARM, which adjusts every six months after the initial period, not every year.

When does a 10/1 ARM adjust?

That’s dependent on when you close on the mortgage. If, for example, you closed your loan on July 1, 2022, the first rate adjustment will happen on July 1, 2032.

When this happens, the interest on your loan is recalculated, and the new monthly payment is based on the rate at the time, which could be either higher or lower than the initial rate or perhaps the same. The following year, your loan will adjust again on the same date, repeating this series of resets annually to the end of the loan.

What index does the 10/1 ARM mortgage use?

The mortgage rate will be the rate of the index, plus a stated margin. Adjustables have been tied to the yield on 1-year Treasury bills, the 11th District cost of funds index (COFI) or the London Interbank Offered Rate (LIBOR). However, LIBOR has been phased out in favor of a new index called the Secured Overnight Financing Rate (SOFR).

For example, in May 2022, SOFR was 1.05 percent. If the margin is 2 percentage points, the loan rate would be the sum of the two, or 3.05 percent.

10/1 ARM vs. 5/1 ARM

The 10/1 ARM is similar to the 5/1 ARM, but the initial rate adjusts after a decade rather than five years. Generally, the interest rate on the 10/1 will be a little higher than the 5/1. Ten years is as long an initial period as is available for a conventional adjustable mortgage.

10/1 ARM vs. 7/1 ARM

The 10/1 ARM is similar to the 7/1 ARM, except the initial rate adjusts after the first 10 years. Again, rates will be higher than the 5/1 or 7/1.

With all these loans, the rate resets every year after the initial fixed period based on the stated index plus a margin. There is a cap on how much the interest rate can rise over the life of the mortgage.

What are the pros and cons of a 10/1 ARM?

Pros

  • Cheaper at first: The big benefit of a 10/1 ARM is cheaper monthly payments compared with a 30-year fixed mortgage. That’s because in recent months interest rates for ARMs have fallen a full percentage point lower than comparable 30-year fixed loans.
  • More house, better area: The lower payment means you can borrow more to get a larger or better-located house.
  • Loan might get even cheaper: If interest rates decline when your fixed period is up, your monthly interest payment will also fall and potentially during resets in the years to come.

Cons

  • Could cost much more in long run: The big risk of the 10/1 ARM is exposure to higher rates after the fixed period expires. If rates have risen, your payment will increase, potentially putting a big dent in your finances.
  • Added complexity: More moving parts to an adjustable mortgage than a fixed one means more possible gotchas. Rate caps, indexes, resets — this can be tough going for the average homeowner to navigate.
  • Interest-only lure: Some ARMs let you only make interest payments and not principal in the initial period. That can allow you to stretch your budget and lower your payment, but after the fixed period your payments will be much higher to include the principal payments you missed. If home values fall like in 2007-2009, you might find yourself underwater on the loan.

Since the average home is sold every 13 years, a 10/1 mortgage might make sense for a lot of homeowners who have no plans to stay in the home much beyond the fixed period of the loan. They’ll enjoy the lower interest rate for a decade.

Written by
Suzanne De Vita
Mortgage editor
Suzanne De Vita is the mortgage editor for Bankrate, focusing on mortgage and real estate topics for homebuyers, homeowners, investors and renters.
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