What You Need to Know About 10/1 Adjustable Rate Mortgages

BY Ori Zohar

A 10/1 adjustable rate mortgage (ARM) features a low fixed interest rate for the first 10 years of the loan that adjusts annually for the rest of the life of the loan (usually 30 years). Depending on the market and on the lender you’re considering, the initial rate of a 10/1 ARM may be lower than the rate for a 30-year fixed rate mortgage.

The relative “risk” involved with any ARM is that the interest rate will likely rise when the loan begins adjusting. How much? The new interest rate is set by the lender based on market conditions, with some restrictions in the form of rate caps for each individual loan. This type of risk might not be for everyone.

However, the fixed interest rate of a 10/1 ARM lasts 10 years – which is longer than the average person lives in one home (8.7 years*). That means many Americans could actually save on their monthly payments and get rid of the loan before the rate adjusts by getting a 10/1 ARM, rather than getting the very popular 30-year fixed rate mortgage.

Benefits:Drawbacks:
  • Competitive initial rate
  • Interest rate caps for adjustments
  • Comparatively long fixed rate period
  • Rate adjusts after the first ten years
  • Rate usually rises when it adjusts
  • Initial rate may not be lower than a 30-year fixed rate mortgage

Why Wouldn’t I Go With a Shorter ARM?

The reason why some people opt for 3-, 5- or 7-year ARMs is because the interest rate gets lower as you shorten the fixed rate period. With a 10-year ARM, your rates will likely be competitive, but they won’t be as low as the rate for ARMs with shorter fixed periods. However, the shorter the initial period, the sooner you have to think about the rate adjustment and either refinance the loan, sell the home, or start making higher monthly payments. In fact, you may even be able to find a fixed rate loan (one that won’t be subject to rate adjustments) with a better rate.

If you choose a 10/1 ARM, you can enjoy the initial fixed rate for a significant amount of time, and if you’re planning on owning the property for only 10 years, then it could make even more sense.

What About The Rate Change?

Just as it’s difficult to predict where the economy will be in 10 years, there’s a lot of uncertainty about how your rate will adjust to once the locked-in period expires. The indices that lenders use to set ARM rates can fluctuate a lot in 10 years. Predicting where they might be that far in advance is practically impossible to do confidently. There are caps on how much the rate can adjust, both each year and over the life of the loan, but those caps only give you an idea of what the ceiling will be, not your specific rate.

Most people try to sell or refinance before the fixed period runs out, and one advantage of the 10/1 ARM is that it offers plenty of time to do so. It’s always possible that the rate adjustment won’t impact you too much, as well.

Are 10/1 ARMs Popular Right Now?

Lately, with rates as low as they’ve ever been, it’s likely that if you keep a 10/1 ARM past the initial 10 years, your rate will go up. So if you’re planning to keep your house for 10 years or less, consider a 10/1 ARM, but remember to compare rates with 30-year fixed rate mortgages, because they might be similar or lower.

As with any mortgage, there are many technical details to consider with an adjustable rate mortgage. If you’re considering an ARM, it’s really important that you speak with a licensed mortgage advisor who understands your needs and works with you to find the right loan for you.

Speak to a Sindeo Mortgage Advisor today. Our Mortgage Advisors are available to answer any questions that you may have. Call us to get solid advice from a helpful, friendly expert that understands your needs and who can find all the options available to you.

 

*Source: Census.gov