10/1 ARM: Your Guide to 10-Year Adjustable-Rate Mortgages

If you’re shopping for a mortgage, one of your goals is to probably find as low of a rate as possible. An adjustable-rate mortgage (ARM) can be one way to secure a lower rate — at least at first before the rate adjusts.

With a 10/1 adjustable-rate mortgage, you’ll get to lock in your rate for 10 years before the interest rate changes annually. Since ARMs typically start out with lower interest rates than fixed-rate loans, they can be attractive options for homebuyers.

What is a 10/1 ARM loan?

An adjustable-rate mortgage, or ARM, is a home loan with an interest rate that can change over time.

Here’s what the two numbers indicate:

1. The first number: The number of years in which your interest rate remains fixed.
2. The second number: How often the rate will adjust annually after that fixed period.

For example, with a 10/1 ARM, the rate stays fixed for the first 10 years of the loan. Each year after that, the interest rate can adjust to reflect market rates.

10/1 ARMs are one of the most popular types of ARMs. While they usually come with higher rates than say a 5/1 ARM or a 7/1 ARM, they’re still competitive relative to 30-year fixed-rate loans.

Learn More: What Is a Mortgage Rate and How Do They Work?

How a 10/1 ARM works

ARMs adjust over time, resulting in a lower or higher monthly payment, depending on how rates are fluctuating. Your payment changes to ensure that your mortgage is paid off on time.

With a 10/1 ARM, your mortgage rate will begin to change after the fixed-rate period of 10 years.

There are often caps on how much a rate can adjust upward, which might save you from unmanageable monthly payments. Here’s a closer look at how 10/1 ARMs work:

Changing rates

Adjustable rates are determined by an index, which offers a look at what’s going on in the market, and a margin that’s added to the market rate.

Every year after the end of your fixed-rate period, the lender takes a look at current market rates and then adds the margin amount to get your new mortgage rate and payment.

Here’s a quick breakdown of how the index and margin make up your rate:

• Index: This is a collection of different rates on the market and is usually expressed as some type of weighted average. In the past, one of the most common indexes used was the London Interbank Offered Rate (LIBOR). However, LIBOR was phased out and many U.S. lenders now use the Secured Overnight Financing Rate (SOFR). Other indexes that could be used include the Constant Maturity Treasuries (CMT) and the Cost of Funds Index (COFI).
• Margin: You won’t pay the base market rate for your mortgage. Instead, the lender will add an extra percentage to the index to determine your rate. For example, if you have a margin of 3.25% and your rate adjusts based on the SOFR — and the SOFR is at 0.10% — your new mortgage rate would be 3.35%.

Keep Reading: ARM vs. Fixed Mortgage: How to Choose Between Them

Interest rate caps

Even though your home loan rate adjusts each year after the initial 10-year fixed period, there are limits on how high your mortgage rate can go.

Normally, rate caps follow a sequence of a first adjustment, subsequent adjustments, and a lifetime cap. One of the most common cap structures is the 2/2/5 cap. Here’s how the 2/2/5 cap structure works:

• Initial adjustment cap: Your initial adjustment, represented by the first number, is the first time the lender adjusts the rate following the end of the 10-year fixed term. In the case of the 2/2/5 cap, the rate can’t be more than two percentage points higher than your initial mortgage rate, no matter how much interest rates have increased since you got your home loan.
• Subsequent adjustment cap: Each year, there’ll be another adjustment to your rate. The cap for this adjustment is indicated by the second number. With the 2/2/5 cap, every subsequent adjustment made can’t exceed two percentage points over the previous rate.
• Lifetime cap: Finally, the last number in your cap structure represents the total lifetime cap, based on your initial rate. In the 2/2/5 example, the interest rate can never be higher than five percentage points above your first rate.

Loan terms

As you look to get a mortgage, remember that 10/1 ARM loans often have an overall term of 15 or 30 years. So, you’ll enjoy a fixed rate for 10 years, and then, depending on the term, your rate will change annually for the remaining five or 20 years.

For a better sense of what you’d pay each month (in principal and interest only) with a 10/1 ARM vs. a fixed-rate mortgage, let’s run through a quick example:

Pros and cons of a 10/1 ARM

You could see a more affordable monthly payment with a 10/1 ARM at the outset of your loan, which might make homebuying more affordable. Refinancing before the 10-year fixed period could save you even more on interest as well.

On the other hand, if you don’t refinance your 10/1 ARM, you could potentially pay more in interest over time if rates rise, and your budget might strain as your monthly payment increases.

Pros

• Relatively long fixed-rate period: A 10/1 ARM has a relatively long fixed-rate period, which can be attractive, especially considering the average homeowner tends to move before then.
• Could potentially pay less in interest: With a 10/1 ARM, you could save on interest as long as rates remain low. Another strategy, because of the length of the initial period, is to make extra payments toward the principal, reducing your balance and paying off the home loan earlier.
• More time to refinance before the end of the initial period: Even if you decide to stay in your home, the longer 10-year period gives you more time to prepare to refinance your home. And you might qualify for a favorable refinance rate later.

Cons

• Potential for a higher mortgage payment: If interest rates rise after that initial 10-year period, you could see a higher mortgage payment. Even with an interest rate cap, a higher payment could significantly impact your monthly cash flow.
• Possibility of more expensive interest overall: If mortgage rates rise over time and you’re unable to refinance, you could pay more in interest in the long run — even with mortgage caps in place.
• Rate differences aren’t always large enough to be worth it: Depending on the lender and situation, there might not be a big interest rate difference between a 10/1 ARM and, say, a 30-year fixed-rate mortgage. In the long run, a slightly higher mortgage payment might be worth it to avoid potentially higher adjustments. Consider, too, that refinancing your mortgage often comes with closing costs that can negate earlier savings.

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When to consider a 10/1 ARM

When deciding whether a 10/1 ARM makes sense for you, it’s a good idea to shop around and compare mortgage rates. Depending on how low 30-year fixed mortgage rates are, you might be better off going with a 10/1 ARM.

Be sure to compare the two when shopping around before committing to a specific loan.

Another consideration is how long you think you’ll have the mortgage. If you think you’ll move again before your rate adjusts, getting a 10/1 ARM might make more sense.

You might also be able to save money on interest with a 10/1 ARM if you plan to pay off your mortgage early, or if you refinance before the initial fixed period ends.