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Considering a 10 year ARM

What is a 10-year ARM?

William Potter / Shutterstock

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Updated: December 11, 2023

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In the market for a new home? While buying a house can bring a lot of joy and excitement, shopping for a mortgage can feel overwhelming. As you’re comparing different mortgages, you might come across the 10-year adjustable-rate mortgage (ARM) and question if it’s the right choice for you. 

This article describes what a 10-year ARM is, how it works, and who might benefit from this type of mortgage.   

Current mortgage and refinance rates

Product
Interest rate
APR
30-year fixed rate
7.07%
7.14%
20-year fixed rate
6.70%
6.80%
15-year fixed rate
6.32%
6.46%
10-year fixed rate
6.34%
6.53%
7-year ARM
7.34%
7.92%
5-year ARM
7.31%
8.03%
3-year ARM
30-year fixed-rate FHA
5.98%
7.06%
30-year fixed-rate VA
6.23%
6.53%

Data from Zillow as of September 20, 2023

10-year ARM mortgage rates

Product
Interest rate
APR
---
Conforming ARM loans 
---
10/6 mo
6.88%
7.47%
7/6 mo
6.75%
7.57%
---
Jumbo ARM loans
---
10/1 yr
7.13%
7.56%
7/1 yr
6.63%
7.44%
5/1 yr
6.88%
7.71%

Data from US bank as of November 22, 2023.

Historical mortgage rates

For years before the COVID-19 pandemic, mortgage rates were trending in a downward direction. In 2020, mortgage rates hit historic lows as people were shuttered inside and worried about what would happen next with the pandemic.

Thanks to rising inflation rates, the Federal Reserve has issued several increases to its key policy rate, leading to higher mortgage rates. For many mortgage borrowers, this has driven up monthly payments. 

As homebuyers look to save on interest, they may consider an adjustable-rate mortgage as it tends to be cheaper in the short term. 

What is a 10-year ARM?

An adjustable-rate mortgage is a mortgage that adjusts at some point throughout the term of the loan. A 10-year adjustable rate mortgage is a loan that maintains a fixed interest rate for the first ten years.

Once the fixed rate term expires, the mortgage rate can adjust up or down, depending on the index rate, at set intervals until the loan is repaid. 

If you decide to take on an ARM, you are accepting a certain amount of risk as you can't predict when and how much interest rates might change. When your ARM adjusts, your payments could increase. Before committing to an ARM, run your numbers to make sure you can afford the maximum increase. 

How does a 10-year ARM work?

The interest rate on a 10-year ARM has two parts: the index and margin.

  • Index: The index is a benchmark interest rate that reflects the overall market conditions. The index rate can change based on the market and different lenders may use different indexes for ARMs.The Constant Maturity Treasury (CMT) and Secured Overnight Financing Rate (SOFR) are commonly used. 
  • Margin: The margin is an extra percentage that is added to the index rate by the lender. Different lenders offer different combinations of the index and margin. This is why it’s worth it to compare multiple lenders before making a decision.  

When you receive your loan estimate, it combines the index and margin for your total monthly payment.

Index + Margin = Your ARM interest rate  

A 10-year ARM represents the length of time that your initial interest rate stays the same. In this case, your ARM stays the same for the first 10 years. After 10 years, you enter into an adjustment period and your interest rate can increase or decrease based on the current index rate and the terms of your loan. 

Your lender will usually provide a minimum and maximum interest rate, which shows how low or high your interest rate can go over the entire length of your loan. In most cases, your rate will never fall below the index rate. 

There are also limits on how much your interest rate can change at each adjustment. The initial adjustment cap represents how much your interest rate can increase during your first adjustment. The subsequent adjustment cap specifies how much your interest rate can change in all future adjustments.  

For instance, your maximum interest rate might specify that your rate can’t rise more than 5% above your initial interest rate over the life of your loan. 

Your initial adjustment might be limited to a 2% interest rate change, and all subsequent adjustments could also be limited to 2%. 

10-year ARM pros and cons

Like any financial decision, there are advantages and disadvantages to a 10-year ARM. 

Pros

Pros

  • Lower initial payments: There is potential to save during the initial loan period with an ARM, as it tends to offer a lower rate than a fixed mortgage. If you expect to move out of your house before the end of the fixed term, you could save money.

  • Falling interest rate: If interest rates fall, there’s potential to secure an even lower interest rate after the fixed rate term ends.

  • Time to refinance: With a 10-year fixed-rate period, you have time to decide if you want to refinance your adjustable-rate mortgage before the fixed-rate period ends.

Cons

Cons

  • Unpredictable: Once the 10-year fixed-rate term is over, you have no way of predicting whether interest rates will rise or fall. Who knows what your financial situation might look like in ten years?

  • Rising interest rate: If the index interest rate rises, your interest rate can go up and increase your monthly payments. If you can’t afford the increase, you risk foreclosure.

  • End up house-poor: If you take advantage of the lower ARM rate to afford a more expensive home, you might find yourself house-poor or completely unable to make payments when the fixed rate ends, and you’re stuck with higher monthly payments.

How to choose between 5-year ARM vs. 10-year ARM

When trying to choose between 5 and 10-year ARM rates, consider your specific situation. 

A 5-year ARM generally comes with a lower interest rate than a 10-year ARM. This means there’s an opportunity to save more in the short term. 

A 10-year ARM typically has a higher interest rate than a 5-year ARM but provides a consistent payment for a longer period. 

When trying to decide between the two options, consider how long you plan to stay in your house. Are you searching for your dream home that you want to stay in forever? Or do you see yourself moving on in the next few years? 

If you plan to stay over ten years, a 10-year ARM might make sense. If you like to move to a new location every few years or are buying your starter home, a 5-year ARM could work for you. 

What is the difference between a 10/6 ARM or 10/1 ARM vs. 30-year fixed mortgage?

For the first ten years of your mortgage, a 10/6 ARM and 10/1 ARM function the same. Both have a 10-year period where you pay a fixed monthly payment. 

However, once the fixed-rate term is over, there is a difference in how often your interest rate will adjust. 

  • 10/6 ARM: Interest rate adjusts every six months for the lifetime of the loan 
  • 10/1 ARM: Interest rate adjusts every year for the lifetime of the loan

With a 30-year fixed-rate mortgage, you lock into a fixed interest rate for the entire duration of your loan. There is no adjustment period – you know what to expect the entire time. 

The main difference between a fixed-rate vs. adjustable-rate mortgage is consistency. 

10/6 ARM or 10/1 ARM vs. 30-year fixed: Which is right for you?

When choosing whether an adjustable or fixed-rate mortgage is right for you, it comes down to your individual needs and wants. 

With an adjustable mortgage rate, you can usually get a cheaper interest rate than you can with a fixed-rate loan. So, if your goal is to secure a lower interest rate during the first ten years to save money or to afford a larger house, you might opt for a 10-year ARM option. 

If you are someone who values consistency and you want your payments to stay the same throughout the length of your loan, a 30-year fixed can make it easy to budget. If there’s a sudden increase in mortgage rates, you’ve got nothing to worry about. 

However, if you’re buying your first home and expect your income to grow over time, you might opt for an ARM to keep your mortgage payments as low as possible, so you can save more money in the first 10 years.

To try and find the best mortgage lender, make sure you compare multiple lenders before making a selection. It’s also important to check your credit score to look for errors on your credit report. This way, you can correct any issues before you apply for a mortgage.  

ARM glossary

  • Fixed-rate mortgage: Maintains a consistent interest rate throughout the life of the mortgage. Your monthly mortgage payments stay the same. 
  • Adjustable rate mortgage: Start with a fixed interest rate for a period of time, and then the rate will adjust with the market. Your monthly payments stay the same during the fixed period and then change based on the market. 
  • Index: The benchmark interest rate that reflects the overall market conditions.
  • Margin: Extra percentage that the lender adds to the index interest. 
  • Rate caps: Limits how much the interest rate can increase. There are typically rate caps for the initial adjustment (how much rate can increase the first time), subsequent adjustments (how much rate can increase over additional adjustment periods), and lifetime adjustments (how much rate can increase in total over the duration of the loan).  

FAQs

  • Is a 10-year ARM worth it?

    +

    Whether a 10-year ARM is worth it depends on your situation and goals. If you can secure a lower interest rate with a 10-year ARM and you plan to move or refinance your adjustable rate mortgage before the fixed-rate period is over, you could save more money than with a fixed-rate mortgage.

  • Can you pay off a 10/1 ARM loan early?

    +

    If you plan to pay off your 10/1 ARM loan early, make sure you check your loan agreement or contact your lender to see if there is a prepayment penalty.

About our author

Jessica Martel
Jessica Martel, Freelance contributor

Jessica is a freelance writer, professional researcher, and mother of two rambunctious little boys. She writes about all things personal finance and is fascinated by the psychology of money and what drives people to make important financial decisions. She holds a Master of Science degree in Cognitive Research Psychology and a Bachelor's degree in Communications and Culture. Her work has appeared in The Balance, Investopedia, Money Under 30, Time.com, Seeking Alpha, Consumer Affairs, and more. When Jessica isn't writing, she enjoys spending time outdoors with her family.

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