10/1 ARM Mortgage Rates
Compare today's current mortgage and refinance 10 year ARM interest rates.
When shopping for a lender and the best interest rate for your next home purchase or refinance, you will often find the best deals (aka lowest rates) in adjustable-rate mortgages. They come in a variety of terms, like (3/1, 5/1, 7/1 and 10/1), each with its own interest rate. In many instances, the initial rates offered are much more attractive than a fixed-rate mortgage.
But before you jump into a 10/1 adjustable-rate mortgage, here is an overview:
What is a 10/1 ARM?
The 10/1 adjustable-rate mortgage (ARM) is a home loan which has one interest rate for a set period followed by a rate which changes at a specific frequency. The numbers X/Y correspond to the following:
- First Number (X) is the number of years in which your interest rate is fixed. It will not change during this period, in this case, 10 years.
- Second Number (Y) is the frequency in which the rate will change after the first period has lapsed. In this case, after the 10-year period has ended, the interest rate will change annually.
Typically, the longer the term, the higher the interest rate. This means you will usually find the 10/1 ARM with a slightly higher interest rate than other ARMs, like the 3/1, 5/1 or the 7/1. Although the 10/1 ARM often carries the highest interest rate, it is typically lower than the popular 30-year fixed mortgage.
How does the 10/1 ARM work?
After the fixed rate period (in this case, 10 years), the interest rate (and your monthly payments) will change based on how rates fluctuate, enabling the borrower to save a lot of money each month in the initial fixed term.
As attractive as that initial rate can be, you must be prepared for the rate to change, on an annual basis. Then you will be subject to fluctuating interest—and payment amounts. To prevent monthly payments from becoming out of control, many ARMs will include an annual ARM cap, a limit on the interest rate or dollar amount you may have to pay. This protects the borrower from a situation where drastically higher mortgage payments could become unbearable.
The market force on the 10/1 adjustable-rate mortgage
Once the initial term has ended, the interest rate on the 10/1 ARM will change annually, based on certain market factors called the INDEX and the MARGIN.
INDEX: The index is a complication of different interest rates on the market, expressed as an average. There are several indexes available to lenders, including:
- Secured Overnight Financing Rate (SOFR), is an index based on the rates that large financial institutions pay each other for overnight loans, and is well-respected due to its transparency.
- Constant Maturity Treasuries (CMT), The monthly one-year CMT value calculated using the daily yield curve of U.S. Treasury securities.
- The Cost of Funds Index (COFI) index is calculated as the sum of the monthly average interest rates for marketable Treasury bills and for marketable Treasury notes, divided by two, and rounded to three decimal places.
- The London Interbank Offered Rate (LIBOR) is a benchmark interest rate at which major global banks lend to one another in the international interbank market for short-term loans, but due to recent scandals and questions around its validity as a benchmark rate, it is being phased out.
MARGIN: In the business of originating home loans, lenders will add an additional percentage to the index to arrive at your final rate. For example, if you have a margin of 3.125% and your rate adjusts based on the CMT index (at 0.1%), your final interest rate would be 3.25%.
The good news is that this is an industry standard and something you can ask about. Most lenders are transparent about these fees—the index they use and their margin—to allow prospective borrowers the opportunity to make a well-informed choice.
Interest rate cap–reducing the risk of steep changes
The idea of an “adjustable rate” may scare off some borrowers, but it doesn’t have to. The rate adjustment is limited, preventing borrowers from a shocking payment increase. Lenders typically issue caps in three different adjustments, called the initial adjustment, subsequent adjustment, and the lifetime cap. One of the most common scenarios for interest rate caps is 2/2/5. The cap structure is explained here:
- The initial adjustment cap is applied when the fixed rate period of the 10/1 ARM ends. In the 2/2/5 example, the lender is limited to adjusting the interest rate no more than 2 percentage points higher than the initial rate, regardless of interest rates at the time.
- Subsequent adjustment caps come into play each year when the 10/1 ARM interest rate changes. In the 2/2/5 cap, this interest rate is also limited to a maximum 2 percent change over the current rate.
- The final number in the interest rate cap number is the lifetime cap. At no time during the life of your 10/1 ARM can the interest rate change more than the stated amount; in the case of the 2/2/5 cap, it cannot increase more than five percent.
How long is a 10/1 ARM term?
Contrary to what the name may indicate, the 10/1 ARM usually has an overall length of 30 years, giving you a 10-year fixed term with a rate adjustment occurring annually for 20 years of the remaining term.
Is a 10/1 ARM right for you?
Potential for lower interest payments. When interest rates remain low, you can save on interest. Another option to save money spent on interest is to make extra payments on the principal during the lower rate, fixed 10 year period. This will allow you to pay off your mortgage earlier.
Long fixed rate period. When compared to other ARMs, the 10 year fixed period is long. And because most people refinance or sell their homes before they pay off the mortgage, you will likely be looking at a new mortgage before the end of the fixed rate period.
Buys you time to refinance before the end of the 10-year fixed rate term. If you are unable to refinance your mortgage before the end of your term, in a rising interest rate market you could be subject to much higher interest payments, even with interest rate caps in place.
Potential for higher overall interest. Once the 10 year fixed term is over, you are at the mercy of current interest rates. If you are unable to refinance your mortgage before the end of your term, you could be subject to much higher interest payments, even with interest rate caps in place.
Risk of higher mortgage payments. If interest rates increase after the fixed 10-year period, you will probably experience higher monthly payments. Although interest rate caps prevent skyrocketing rate changes, the higher payments could seriously affect your monthly budget.
Underwriting may not work in your favor. With 2 different parts of the 10/1 ARM, the lender will underwrite the loan for the 1-year portion and not the initial 10-year term of the mortgage (with the lower payments). This higher amount will be calculated against your DTI ratio.
10/1 ARM rate difference may not be worth the risk. Since rates and terms vary between lenders, you may not see a drastic difference in rates between the 10/1 ARM and a longer term fixed rate mortgage. Because of the risk of higher payments after the initial fixed rate expires, you may find a long-term fixed rate, even if slightly higher, a safer bet.
A typical 10/1 ARM consumer
A 10/1 ARM offers borrowers the chance to take advantage of competitive interest rates, and lower payments can equate to a larger house (and mortgage). It is a good option for borrowers who may relocate often and/or upgrade their homes as their income increases. It is also a good option for home buyers who are confident they will be selling or refinancing their home within the initial fixed rate period and want to take advantage of an especially low interest rate.
Start the process for a 10/1 ARM mortgage today
Start the process for either a purchase or refinance 10/1 ARM mortgage and have a licensed loan officer contact you for a custom quote today.
What is a 10/1 ARM mortgage?
A 10/1 ARM (short for adjustable rate mortgage) is an adjustable rate loan which includes a 10-year fixed period, followed by a changing interest rate every year (hence the “1” in the designation) until the loan is paid off.
How does a 10/1 ARM mortgage work?
Interest rates are often lower than with a fixed mortgage, so you can save hundreds each month in the initial 10-year fixed term. As attractive as that initial rate can be, you must be prepared for the rate to change, on an annual basis. Then you will be subject to fluctuating interest—and payment amounts.
Is a 10/1 ARM mortgage loan a good idea?
An 10/1 ARM offers borrowers the chance to take advantage of competitive interest rates, and the lower payments mean physicians can afford a larger house (and mortgage). Additionally, because most people refinance or sell their homes before they pay off the mortgage, it is a good option for physicians, who often relocate with the jobs and/or upgrade their homes as their income increases.
Lock in your 10/1 ARM rate today
With a wide variety of financing options a loan officer can help you find and lock in the best 10/1 ARM mortgage rate for purchasing a home or refinancing your existing mortgage. Contact us to get started today!
10/1 ARM mortgage rates change daily and are determined by 5 major driving factors which you can control: Property type and use, loan-to-value ratio, your FICO score, and whether you are purchasing or refinancing the mortgage.
Getting the lowest 10/1 ARM jumbo refinance rate depends on 4 main elements: the refinance type (rate/term or cash out), the amount of equity you have in the property, any second mortgages, liens or subordinate financing you already have, and your financial report card.
Jumbo (loan amount >$548,250) 10/1 ARM rates are typically higher than conforming loans. This process should also include comparing loan estimates, having a 740+ FICO score, 60% (or less) loan-to-value, and the property being your primary residence.
Conforming (loan amount <$548,250) 10/1 ARM rates are typically lower than jumbo loans. This process should also include comparing loan estimates, having a 740+ FICO score, 60% (or less) loan-to-value, and the property being your primary residence.