What Is a 10/1 Adjustable-Rate Mortgage (ARM)?

What Is a 10/1 ARM?

With any ARM, the first number represents how long the initial fixed-rate period lasts, and the second tells you how frequently your mortgage rate will be recalculated going forward. Therefore, a 10/1 ARM means your monthly mortgage payment can change once per year after 10 years of fixed payments. Your new rate could be higher or lower than what you had before.

No matter what type of home loan you get, you can expect the interest rate to either be fixed or variable. A fixed-rate mortgage is exactly what it sounds like, meaning that you'll have the same interest rate for the loan's duration. Adjustable-rate mortgages are different and allow for periodic rate changes.

Learn more: Fixed-Rate vs. Adjustable-Rate Mortgage: What's the Difference?

How Does a 10/1 ARM Work?

One of the main draws of an ARM is that during the introductory period, your interest rate will likely be lower than what you'd pay with a fixed-rate mortgage. For example, if the average rate for a 30-year fixed-rate loan is 6.62%, you may find a 10/1 ARM with an initial rate as low as 5.99%. You might get an even lower initial rate if you opt for an ARM that has a shorter introductory period, such as a 7/1 ARM.

Market trends at the time adjustments are made will influence your new rate. If interest rates are on an upward swing, you could be in for a rate hike—and vice versa. Your lender will likely consider a benchmark rate like the Constant Maturity Treasury (CMT) rate or the U.S. prime rate, then add extra percentage points to reflect their ARM margin.

This is all to say that once the 10-year introductory period ends, your monthly payment could change on an annual basis—for better or worse.

Learn more: Common Types of Adjustable-Rate Mortgages

Example of a 10/1 ARM Rate Adjustment

Let's say you have a 10/1 ARM with an initial interest rate of 6%. Your original loan amount is $300,000. For simplicity, we won't factor in additional costs like property taxes and homeowners insurance. Your monthly payment for the first 10 years could be as low as $1,799.

Now let's assume a 2% rate increase every year after that, up to a lifetime cap of 5%. (This is the maximum amount your rate can increase over the life of the loan.) All in all, your monthly payment could balloon as high as $2,569, depending on your lender's ARM margin. But it's worth mentioning that your payment could also decrease if rates go down.

What Are the Requirements for a 10/1 ARM?

In terms of eligibility criteria, 10/1 ARMs aren't that different from fixed-rate mortgages. With either type, lenders typically look at the following details:

• Your creditworthiness: A strong credit history can help you qualify for the best rates and terms on a 10/1 ARM. If you're seeking a conventional mortgage, you'll likely need a credit score of at least 620.
• Your debt: A high debt load could impact your eligibility. Every lender is different, but most prefer a debt-to-income ratio (DTI) that's under 43%.
• Your down payment: The higher your down payment, the less you'll need to finance. Different loan programs have their own minimum down payment requirements. Some conventional loans allow homebuyers to put down as little as 3%.
• Your mortgage type: The type of 10/1 mortgage you're seeking will impact your eligibility criteria. Federally backed mortgages like FHA loans typically require a lower credit score and down payment than conventional loans.

How to Compare 10/1 ARMs

Each lender is unique when it comes to mortgage rates, terms and rate caps. Shopping around and comparing quotes from multiple lenders can help you find the right mortgage for you. Zero in on the following:

• Introductory rate: This is the interest rate you'll pay during the first 10 years of your loan term.
• Adjustment intervals: With a 10/1 ARM, your rate will be adjusted annually when the introductory period ends. When comparing loan options, you might come across ARMs that recalculate every six months. (These will have a 6 as the second number; for example, a 10/6 ARM.)
• Initial adjustment cap: This is the maximum amount your interest rate can change during the first adjustment period. It's usually 2% or 5%.
• Periodic adjustment caps: This is the maximum amount your rate can change during each subsequent rate adjustment. It's typically 1% or 2%.
• Lifetime cap: This tells you the maximum amount your rate can increase during the life of your loan. It's usually 5%.

Pros and Cons of a 10/1 ARM Loan

Just like fixed-rate mortgages, 10/1 ARMs come with pros and cons. Understanding them can help you decide if it's the right type of home loan for you.

Should You Get a 10/1 ARM?

Whether or not you should get a 10/1 ARM depends on what you're looking for in a mortgage. If you prefer a set-it-and-forget-it option, a 15- or 30-year mortgage with a fixed rate will give you the predictability of a steady monthly payment. But a 10/1 ARM may be a good option if:

• You plan on moving before the fixed-rate period ends. If you don't see yourself staying in the home for more than 10 years, a 10/1 ARM can provide a lower interest rate before you sell.
• You don't mind the unpredictability. If your adjustment caps feel reasonable, and you have the income to cover potential rate increases, a 10/1 ARM might feel like a good fit—especially if you like the idea of a potential rate decrease in the future.
• You're OK with possibly refinancing. You always have the option to refinance to a fixed-rate loan. Closing costs on a refinance can range from 2% to 6% of the loan amount, but the long-term savings may be worth it.

Tip: There's no guarantee that you'll be able to refinance or sell your home before your ARM's rate begins to adjust. Be sure to calculate the maximum monthly payment you could owe (using your loan's rate cap) so you understand how much your payment could increase over time.

Learn more: Can You Refinance an Adjustable-Rate Mortgage?

Alternatives to a 10/1 ARM

After weighing the pros and cons, you may decide that a 10/1 ARM isn't the right type of mortgage for you. In that case, consider these alternatives:

• Another ARM that's structured differently: That might be an ARM that has a shorter introductory period and lower initial interest rate, or one that adjusts every six months instead of 12. You can explore all your options before making a decision.
• A fixed-rate mortgage: Your rate and monthly payment will never change. That can provide peace of mind and prevent the unwanted stress of rate adjustments. Opting for a 15-year term will result in a larger monthly payment, but you'll pay less interest overall (and you'll pay off your loan faster).

Learn more: What Type of Mortgage Is Best?

Frequently Asked Questions

The Bottom Line

A 10/1 ARM is one of many mortgage options available to homebuyers. You'll likely enjoy a lower-than-average interest rate for the first 10 years. After that, your rate could bounce up and down annually, so you'll need to decide what makes the most sense for your financial situation. That might involve refinancing to a fixed-rate mortgage.

Either way, you can expect mortgage lenders to take a deep dive into your finances and credit health. A strong credit score could lead to better mortgage rates and terms. To see how yours measures up, you can check your FICO^® Score^☉ and credit report for free from Experian.