10/1 ARM: 10/1 Adjustable Rate Mortgage
What is a 10/1 ARM?
A 10/1 ARM is a loan with a fixed interest rate in its first years followed by a variable interest rate in the remaining years. The years of fixed interest rates are represented by the “10” and the “1” represents the annual interest rate reset (change).
The variable interest rate is made up of an underlying index and the lender’s margin. The index is a market rate that represents the cost of borrowing for the lender like the fed fund rate, treasury bill or LIBOR. This is the variable component of the rate charged as it can go up or down according to market conditions. What the lender charges on top of the index is their margin and does not change during the lifespan of the mortgage.