A 10/1 ARM loan is a cross between a fixed-rate loan and a variable-rate loan. After an initial 10-year period, the fixed rate converts to a variable rate. It remains variable for the remaining life of the loan, adjusting every year in line with an index rate.
A 10/1 ARM makes the most sense if you plan to sell your home or refinance your mortgage before the 10-year fixed period ends. If you do this, you can take advantage of the low initial interest rate that comes with an ARM without worrying about your rate rising once the fixed period ends.
For example, if you plan to live in your house for eight to 10 years, taking out a 10/1 ARM (where the introductory rate lasts 10 years) is more cost-effective. A 10/1 ARM is usually between 0.25% to 0.5% less expensive than a 30-year fixed-rate mortgage.
You can sometimes pay off a 10/1 ARM early by taking advantage of the fixed-rate period. While you're paying lower interest, you can put extra cash toward the principal amount. That way, variable interest rates later on are based on a lower principal amount, which would bring your monthly payments down.
But an 7-year ARM could be a “good risk” for mortgage consumers. It offers low rates, and two additional years of fixed payments compared to the more popular 5-year ARM. That extra time to sell or refinance could be the sweet spot for those who will not keep their home the full thirty years.
Cons of an adjustable-rate mortgage
Rates and payments can rise significantly over the life of the loan, which can be a shock to your budget. Some annual caps don't apply to the initial loan adjustment, making it difficult to swallow that first reset. ARMs are more complex than their fixed-rate counterparts.
Another con of an ARM is that your loan terms and interest rate may at first be more lenient because of the lower monthly payments. So, if you want to refinance down the line into a fixed rate, it could be difficult to get approved for the same size mortgage loan.
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.
Some home buyers who choose an ARM plan to avoid the risk of higher rates altogether. An ARM can be perfectly safe if you're planning on moving or refinancing the mortgage within your initial fixed-rate period. Because you'll close the ARM before higher rates can kick in. However, there's always risk of plans changing.
With an ARM, borrowers lock in an interest rate, usually a low one, for a set period of time. When that time frame ends, the mortgage interest rate resets to whatever the prevailing interest rate is.
ARMs are easier to qualify for than fixed-rate loans, but you can get 30-year loan terms for both. An ARM might be better for you if you plan on staying in your home for a short period of time, interest rates are high or you want to use the savings in interest rate to pay down the principal on your loan.
ARMs are also attractive because their low initial payments often enable the borrower to qualify for a larger loan and, in a falling-interest-rate environment, allow the borrower to enjoy lower interest rates (and lower payments) without the need to refinance the mortgage.
Gurevich: An ARM may be a good option if the borrower knows they will not be keeping the property longer than the fixed-rate period of the ARM. A borrower may choose an ARM if they have the financial ability to withstand major interest rate fluctuations and potentially a significantly higher payment as well.
Prepayment penalties.
Some ARMs, especially interest only and payment options, charge fees if you try to pay off the loan early. That means if you decided to sell your home or refinance it, you will pay a penalty on top of paying off the balance on your loan.
5.371% Learn more about interest rates and Annual Percentage Rate (APR)1and see an estimated ARM monthly payment and APR example. 2. Calculate my payment Get a prequalification estimate.
You might have to pay a prepayment penalty if you sell or refinance. If you do decide to refinance your adjustable-rate mortgage to get a lower interest rate, you could be hit with a prepayment penalty, also known as an early payoff penalty. The same applies if you decide to sell your home before paying off the loan.
Adjustable Rate (ARM) Mortgages Have Been Shunned For Years — But Should Be Considered In 2022. During the last few years, few mortgage borrowers have bothered with adjustable rate mortgages (ARMs). According to analysts at Ellie Mae, market share for the ARM mortgage is about four percent of all mortgages sold.
With an ARM, the interest rate changes periodically, usually in relation to an index, and payments may go up or down accordingly.
An ARM has four components: (1) an index, (2) a margin, (3) an interest rate cap structure, and (4) an initial interest rate period.
Rates could level off
“The supply shortage will keep prices relatively stable over 2023, returning to a more modest appreciation rate in the near term.” On the other hand, Bowman foresees 2023 rates in the mid-7% range, with home prices appreciating about 5 percent.
Refinancing can be done for many reasons, but switching from an adjustable-rate mortgage (or ARM) to a fixed-rate mortgage is one of the most common. The general rule of thumb is that refinancing to a fixed-rate loan makes the most sense when interest rates are low.
The first, and most obvious option for those with low-rate ARMs that are about to reset is to refinance into a 30-year fixed rate loan, or at least a 7-year ARM. This will give you reasonable monthly payments that will last much longer than your previous loan.
Borrowers with a 15-year term pay more per month than those with a 30-year term. In return, they receive a lower interest rate, pay their mortgage debt in half the time and can save tens of thousands of dollars over the life of their mortgage.
A 7/1 ARM is a good option if you intend to live in your new house for less than seven years or plan to refinance your home within the same timeframe. An ARM tends to have lower initial rates than a fixed-rate loan, so you can take advantage of the lower payment for the introductory period.