Adjustable rate mortgages (ARMs) have become increasingly more popular in recent years, thanks to the introduction of “hybrid” adjustable rate mortgages. Hybrid ARM products combine the adjustable rate mortgage and fixed rate mortgage structures into one single product. These loans begin with an introductory period of time in which the interest rate is fixed, before converting to a variable interest rate structure, where the rate can be adjusted or “reset” at predetermined intervals.
The 10/1 Adjustable rate mortgage is one of the largest hybrid ARM packages on the market. 10/1 ARMs have an introductory period of 10 years in which the interest rate remains fixed. When the introductory period ends, then the rate converts into an adjustable interest rate. During the adjustable period, resets are made annually (every 1 year). This gives homeowners a comfortable 10 years to enjoy lower than average interest on their monthly mortgage payments, before tackling the plausibly increased monthly payments or refinancing to a fixed rate mortgage.
It is important to remember that hybrid ARMs like the 10/1 ARM are still 30-year loans unless stated otherwise. The attractive quality that these loans share is that for the initial fixed rate period, the fixed interest rate is lower than you would get with a traditional 30-year fixed rate mortgage. That is why many borrowers get hybrid ARMs, and then refinance after the fixed rate period ends. This particular product is popular among home buyers who want to enjoy the low rates hybrid ARMs offer without having to worry about refinancing in a hurry.
Is a 10/1 Adjustable Rate Mortgage (ARM) Right for Me?
It has always been that borrowers are unsure whether or not an adjustable rate mortgage is worth the risk. With a hybrid ARM, as long as you are in a position to refinance after the initial fixed-rate period, they most definitely are. 10/1 ARMs are great because they offer such a long amount of time (10 years) to make some significant savings on your monthly mortgage payments, since it is quite common that with hybrid ARMs, the interest rate available during the initial fixed rate period is often much lower than the rate for any traditional fixed interest rate mortgage on the market.
Borrowers of 10/1 ARMs have a full 120 months (an entire third of a 30-year loan term) of significantly reduced monthly mortgage payments to save some money at the beginning of their loan term, or to knock down their principal amount (providing there are no prepayment penalties). This situation is ideal for home buyers who would like to invest their money elsewhere within the same time frame of buying a home.
Like the other hybrid ARM products, the 10/1 ARM is not a feasible option for borrowers who may be unwilling or unable to refinance or sell their home once the initial fixed-rate period ends and the adjusted monthly mortgage payments are outside of their affordable price range. Conversely, if a borrower is only looking to temporarily settle in one place, the 10/1 ARM is an option that could very well give them substantially lower monthly mortgage payments thanks to the competitive interest rate during the fixed rate period, after which they can sell the home and move on.
10/1 Adjustable Rate Mortgages: In Review
If you’re a home buyer looking to score some substantial savings at the beginning of your loan term, then hybrid adjustable rate mortgages might be just the right loans for you. Just remember, if you decide to get a 10/1 ARM, those savings will only last for the first 10 years of your loan term, and then you either have to come up with the extra cash each month to cover the larger monthly payments if the rate rises when adjusted (which it almost certainly will), refinance your home loan if you are eligible to do so, or sell your home.
The rates during the initial fixed rate period for a 10/1 ARM are much lower than rates you’ll find for standard fixed rate mortgages on the market, so all things considered, it may still be your best way to save some money. If you need some advice on figuring out if a 10/1 ARM is right for you, don’t hesitate to reach out to us and speak with a home.loans mortgage specialist. We’ll help find the absolute best mortgage solution for you, completely risk-free.