10/1 ARM: 10/1 Adjustable Rate Mortgage in Home Loans
10/1 ARM Basics
What is a 10/1 ARM?
A 10/1 ARM is one type of hybrid adjustable-rate mortgage. Much like other hybrid loans, a 10/1 ARM has a fixed period (in this case, 10 years) during which your interest rate won’t change. That makes it one of the safest types of hybrid mortgages, as it gives you a lot of time to figure out your financial situation and determine whether you want to continue owning your home after the adjustable-rate period begins.
What happens after the first 10 years of a 10/1 ARM?
After the first 10 years of a 10/1 ARM, the adjustable-rate period kicks in, which means you might have to start paying a lot more each month on your mortgage. After the 10-year period, the rate you’ll pay is adjusted every year, hence the “1” part of the 10/1 ARM.
Can you get a 10/1 ARM on a jumbo or non-conforming mortgage?
If you’re planning to get a non-conforming or jumbo mortgage, you can still get a hybrid loan like a 10/1 ARM. Whether it’s because your credit isn’t stellar, or because you want to purchase a home that costs more than the conforming loan limit for your state, a 10/1 jumbo ARM can still be an option.
When is an 10/1 ARM a good home loan option?
Well, that depends. With any adjustable-rate home loan, the borrower should be willing to take on a little more risk. It also helps to have great credit and a decent amount of cash reserves. But, since a 10/1 ARM gives you a lot more wiggle room, it might still be appropriate for people with a medium level of risk tolerance who just want to lock in a good rate. In some cases, that might even include first-time homebuyers who were initially considering a 30 year fixed-rate mortgage.
Either way, if you’re getting a hybrid loan, you should be prepared to sell or refinance the home after the fixed-rate period ends -- unless you’re okay with paying the highest possible interest rates.
But, if you absolutely love risk (and want to do whatever it takes to get the lowest interest rate), you might prefer a different home loan option, like a 5/1 ARM or a 7/1 ARM, which have 5- and 7-year fixed-rate periods, respectively.
What is a lifetime cap on a 10/1 ARM?
You already know that interest rates can climb steadily after the fixed-rate period on your 10/1 ARM ends. But just how high can they go? That depends on what’s called a “lifetime cap,” i.e. the maximum interest rate than can be charged during the life of the mortgage. Most of the time, this is expressed as a percentage increase from the initial (fixed) rate. So, if you’re getting a 10/1 ARM with a fixed rate of 4%, and the lifetime cap is 4%, the maximum interest you’ll pay is 8%.
Fortunately, however, your interest rate is unlikely to jump from 4% to 8% in just one year, since ARMs also usually have periodic caps. A periodic cap is a limit on the percentage that a mortgage can increase during an adjustment interval.
For a 10/1 ARM (or any ARM with a “1” at the end), that’s one year. So, if your periodic cap is set at 1%, in the example above, your rate could only go as high as 5% in one year. And, it would take an entire 4 years for your rate to go up to 8%.