10/1 ARM Mortgage Loan

A 10/1 ARM (Adjustable-Rate Mortgage) is a 30-year loan where the interest rate is fixed for the first 10 years. After that, the rate can adjust annually for the remaining 20 years based on market conditions. The "10" represents the years of fixed rate, while the "1" indicates that the rate can change once per year after the fixed period.

After the 10-year fixed period, the interest rate on a 10/1 ARM can adjust annually based on:

• The index the loan is tied to (often the Secured Overnight Financing Rate or SOFR)
• The margin set by the lender
• Any rate caps specified in the loan terms

Rate caps in a 10/1 ARM limit how much the interest rate can change. There are typically three types of caps:

• Initial adjustment cap: Limits how much the rate can increase at the first adjustment after the fixed period
• Subsequent adjustment cap: Limits how much the rate can increase in one year for all adjustments after the initial one
• Lifetime cap: Sets the maximum interest rate increase over the life of the loan

A 10/1 ARM might be beneficial for:

• Homebuyers who plan to sell or refinance within 10 years
• Those who expect their income to increase significantly in the future
• Buyers looking for lower initial payments compared to a 30-year fixed-rate mortgage
• People comfortable with some uncertainty in exchange for potential savings

Generally, 10/1 ARM rates are lower than 30-year fixed-rate mortgages during the initial 10-year fixed period. This is because the lender is only guaranteeing the rate for 10 years, not 30. However, after the fixed period, 10/1 ARM rates can potentially increase above fixed-rate mortgage levels.

The trade-off is between lower initial payments with a 10/1 ARM and the long-term predictability of a fixed-rate mortgage. Your choice should depend on your financial goals, risk tolerance, and how long you plan to stay in the home.

For the most up-to-date rate comparisons, speak with one of our mortgage experts.