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?
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.