10/1 ARM: Your Guide to 10-Year Adjustable-Rate Mortgages

Credible takeaways

A 10/1 adjustable-rate mortgage (ARM) has a fixed interest rate for 10 years, followed by adjustments based on the market.
Payments with a fixed rate are more predictable since they don’t fluctuate.
10/1 ARMs can be beneficial if you plan to sell or refinance during the fixed-rate period.

A 10/1 ARM is a type of mortgage with an interest rate that adjusts periodically. Many ARMs have a lower introductory rate for a certain number of years before entering an adjustment period. If you’re looking for a mortgage with lower interest rates in the near term, a 10-year ARM might be worth considering. Just make sure you’re prepared for your introductory fixed rate to switch to a variable one; since your rate will change based on market conditions, your payment will be less predictable.

Here’s what you need to know about 10/1 ARMs, including how they work, pros and cons, and when they make the most sense.

What is a 10/1 ARM loan?

An adjustable-rate mortgage is a home loan with an interest rate that can change over time. You typically have a period when your rate will be fixed, followed by the adjustment period (which is when your rate might change). The two numbers at the beginning tell you how long your ARM will be fixed and how frequently adjustments will be made:

The first number: The number of years your interest rate remains fixed.
The second number: How often the rate will adjust annually after that fixed period.

For example, with a 10/1 ARM, the rate stays fixed for the first 10 years of the loan. Each year after that, the interest rate can adjust to reflect market rates.

10/1 ARMs are one type of variable-rate home loan. You might also come across 5/1, 7/1, or 5/6 ARMs, which adjust every six months instead of annually.

Good to know:

A 10/1 ARM differs from a 10-year mortgage. With the latter, you’ll pay off the mortgage over the course of a decade. But with a 10/1 ARM, you often take on a 15- or 30-year term.

Learn More: What Is a Mortgage Rate and How Do They Work?

How a 10/1 ARM works

ARMs adjust over time, resulting in a lower or higher monthly payment, depending on how rates fluctuate. Your payment changes to ensure that your mortgage is paid off on time.

With a 10/1 ARM, your mortgage rate will begin to change after the fixed-rate period of 10 years.

There are often caps on how much a rate can adjust upward, which might save you from unmanageable monthly payments. Here’s a closer look at how 10/1 ARMs work:

Changing rates

Adjustable rates are determined by an index, which examines the market, and a margin that’s added to the market rate.

Every year after the end of your fixed-rate period, the lender reviews current market rates and then adds the margin amount to get your new mortgage rate and payment.

Here’s how the index and margin make up your rate:

Index: This is a collection of different rates on the market and is usually expressed as some type of weighted average. In the past, one of the most common indexes used was the London Interbank Offered Rate (LIBOR). However, LIBOR was phased out and many U.S. lenders now use the Secured Overnight Financing Rate (SOFR). Other indexes that could be used include the Constant Maturity Treasuries (CMT) and the Cost of Funds Index (COFI).
Margin: You won’t pay the base market rate for your mortgage. Instead, the lender will add an extra percentage to the index to determine your rate. For example, if you have a margin of 3.25% and your rate adjusts based on the SOFR — and the SOFR is at 0.10% — your new mortgage rate would be 3.35%.

Tip:

To understand how your rate is set, ask your lender which index it uses, along with the margin it adds to the index.

Keep Reading: ARM vs. Fixed Mortgage: How to Choose Between Them

Interest rate caps

Even though your home loan rate adjusts each year after the initial 10-year fixed period, there are limits on how high your mortgage rate can go.

Normally, rate caps follow a sequence of a first adjustment, subsequent adjustments, and a lifetime cap. One of the most common cap structures is the 2/2/5 cap. Here’s how the 2/2/5 cap structure works:

Initial adjustment cap: Your initial adjustment, represented by the first number, is the first time the lender adjusts the rate following the end of the 10-year fixed term. In the case of the 2/2/5 cap, the rate can’t be more than 2 percentage points higher than your initial mortgage rate, no matter how much interest rates have increased since you got your home loan.
Subsequent adjustment cap: Each year, there’ll be another adjustment to your rate. The cap for this adjustment is indicated by the second number. With the 2/2/5 cap, every subsequent adjustment made can’t exceed 2 percentage points over the previous rate.
Lifetime cap: Finally, the last number in your cap structure represents the total lifetime cap, based on your initial rate. In the 2/2/5 example, the interest rate can never be higher than 5 percentage points above your first rate.

Loan terms

As you shop for a mortgage, remember that 10/1 ARM loans often have an overall term of 15 or 30 years. So, you’ll enjoy a fixed rate for 10 years, and then, depending on the term, your rate will change annually for the remaining five or 20 years.

Pros and cons of a 10/1 ARM

You could see a more affordable monthly payment with a 10/1 ARM at the outset of your loan, which might make homebuying more affordable. Refinancing before the 10-year fixed period could save you even more on interest as well.

On the other hand, if you don’t refinance your 10/1 ARM, you could potentially pay more in interest over time if rates rise, and your budget might strain as your monthly payment increases.

Pros

Relatively long fixed-rate period: You’ll have a fixed interest rate longer than other ARM types, which can be beneficial if you plan to move before the variable period begins.
Could potentially pay less in interest: The initial interest rate is usually lower with a 10/1 ARM, which can give you lower payments in the short term. In addition, you could pay a little extra to help reduce your principal.
More time to refinance before the end of the initial period: A 10/1 ARM can also be useful if you want to refinance your mortgage later. The 10-year fixed period gives you more time to shop around and find the best interest rates.

Cons

Potential for a higher payment: There’s no guarantee of moving or refinancing before the adjustment period begins. Be ready for the possibility that you’ll be keeping your 10/1 ARM past the fixed-rate period — and that may mean a higher interest rate.
Possibility of more expensive interest: Your mortgage rate could rise after the fixed-rate period ends, even with rate caps. If you’re unable to refinance and get a lower interest rate, you could end up paying more than you expected.
Rate differences may not be worth it: You can save in the short term with a lower interest rate, but you should consider your long-term plans. Such as whether you think the rate adjustments will be manageable or if you’ll move before the variable period.

Expert tip:

“Don’t forget closing costs, which can be up to 6% of your refinance amount (on a $200,000 loan, that can cost up to $12,000). If you’re planning to refinance a 10/1 ARM, make sure these fees won’t erase your savings.” — Valerie Morris, Editor, Mortgages

When to consider a 10/1 ARM

A 10/1 ARM can be beneficial in certain situations:

Moving within 10 years: You might consider a 10/1 ARM if you think you’ll be moving before the rate adjusts. In this scenario, you may be able to find a lower initial rate and move before it adjusts.
Paying off mortgage early: If you anticipate paying off your home loan ahead of time, this may be a good option. Look at several lenders and loan types to make sure it’s the best option to reach your payoff goal.
Refinancing: This might benefit you if you’re planning to refinance within 10 years. If you’re banking on getting a lower interest rate in the next decade (as either your credit score or financial situation improves or interest rates drop), you might consider a 10/1 ARM.

Before you commit to a 10/1 ARM, shop around and compare mortgage rates. You might find different interest rates from several mortgage lenders for the same loan products. In addition, interest rates on 15-year mortgages tend to be lower than rates on 30-year loans, so look at a variety of terms to help find the lowest rates.

FAQ

Can I refinance my 10/1 ARM before the adjustable-rate period begins?

Open

Refinancing before the fixed-rate period ends is one way to avoid the unpredictability of rate adjustments. However, refinancing isn’t guaranteed. If your situation changes or the value of your property goes down, you might not be able to qualify for a lower interest rate.

How will my ARM change at the end of 10 years?

Open

After your fixed-rate period ends, you enter the adjustment period. During this time, your rate will be evaluated each year. The lender will calculate your interest rate based on the index plus a margin the lender adds. There will typically be caps on how much your rate can change during each adjustment. Your rate will adjust annually for the remainder of your loan term, unless you sell or refinance.

Can I pay off a 10/1 ARM early?

Open

You might have additional penalties and fees if you pay off a 10/1 ARM early, but it often depends on your mortgage lender. In some cases, there may be fees if you pay off the loan entirely during the initial fixed period.