A 10/1 adjustable rate mortgage (ARM) is a type of 30-year mortgage. With this type of mortgage, the interest rate you pay is fixed for the first part of your mortgage, and then varies after that. With a 10/1 adjustable rate mortgage, your initial interest rate is fixed for 10 years, and then it will change once a year after that.

What is a 10/1 ARM?

Some mortgages start out with a fixed interest rate, and then have a variable interest rate afterward. A 10/1 ARM is one example of this type of mortgage.

A 10/1 ARM lasts for 30 years. For the first 10 years the interest rate is fixed. Then, for the next 20 years, the interest rate can increase or decrease once a year depending on the formula stated in the loan agreement. This is what the “10” and the “1” refer to in the name of the mortgage.

Some mortgages have the same mix of fixed and variable rates, but swap from one to the other after a different initial period, or have more variable interest rates. A 10/6 ARM, for example, adjusts every six months after the initial period, not every year.

How does a 10-year adjustable rate mortgage work?

A 10/1 ARM is a hybrid mortgage – that is, a mortgage with a fixed period and a variable period. For the first 10 years, you will always pay the same interest rate on your mortgage. After that, your rate can fall or rise, depending on the general interest-rate trends.

ARM interest rates are composed of two parts. There is a “margin” rate, which is a base rate that always stays the same. To this is added an “index rate,” which will go up or down depending on the prevailing interest rates.

Competitive ARM lenders often offer limits as to how much your interest rate can increase during your variable period. You’ll often see this stated as three numbers – 2/2/5, for example. Each number represents the maximum increase over your initial rate your lender is allowed to charge at various points in your mortgage:

• The first number is the maximum increase allowed when your lender first adjusts the rate (that is, after 10 years with a 10/1 ARM).
• The second is the maximum your rate can increase each time your lender adjusts the rate. With a 2/2/5 ARM, if you are at 6 per cent, your lender can’t raise this above 8 per cent in one step.
• The final number is the maximum your lender will ever charge in interest, again above your initial rate. If you have an initial rate of 5 per cent, and have a 2/2/5 ARM, you will never pay more than 10 per cent interest.

When does a 10/1 ARM adjust?

That’s dependent on when you close on the mortgage. If, for example, you closed your loan on July 1, 2022, the first rate adjustment will happen on July 1, 2032.

When this happens, the interest on your loan is recalculated, and the new monthly payment is based on the rate at the time, which could be either higher or lower than the initial rate or perhaps the same. The following year, your loan will adjust again on the same date, repeating this series of resets annually to the end of the loan.

What index does the 10/1 ARM mortgage use?

The mortgage rate will be the rate of the index, plus a stated margin. Adjustables in the past have been tied to the yield on 1-year Treasury bills, the 11th District cost of funds index (COFI) or the London Interbank Offered Rate (LIBOR). However, in the last year, LIBOR has been phased out in favor of a new index called the Secured Overnight Financing Rate (SOFR).

For example, in May 2022, SOFR was 1.05 percent. If the margin is 2 percentage points, the loan rate would be the sum of the two, or 3.05 percent.

10/1 ARM vs. other loan types

A 10/1 ARM is similar to some other hybrid mortgages. The main difference between a 10/1 ARM and other hybrid mortgages is how long your fixed interest rate will last for, and how frequently your interest rate can be adjusted afterward.

• 10/1 ARM vs. 5/1 ARM. A 5/1 ARM works in much the same way as a 10/1 ARM, but the initial, fixed-rate period is shorter – just five years. Generally, the interest rate on the 10/1 will be a little higher than the 5/1. Ten years is as long an initial period as is available for a conventional adjustable mortgage.
• 10/1 ARM vs. 7/1 ARM. The 7/1 ARM is also similar to the 10/1 ARM, except the initial rate adjusts after the first seven years. Again, rates will be lower with a 7/1 ARM because your lender can start adjusting your rate sooner.
• 10/1 ARM vs. 30-year fixed rate mortgage. A fixed rate mortgage has the same interest rate for the entire loan term – normally 15 or 30 years. A fixed-rate mortgage gives you the certainty that your rate will never go up, but it’s possible that you could pay less if you take out an ARM and interest rates drop. Ultimately, if you can lock in a lower interest rate and you expect to be in the home for less than a decade, the 10/1 ARM can be a smart move.

What are the pros and cons of a 10/1 ARM?

A 10/1 ARM has several advantages and disadvantages, just like any mortgage.

Pros

• Cheaper at first: The big benefit of a 10/1 ARM is cheaper monthly payments compared with a 30-year fixed mortgage. That’s because in recent months interest rates for ARMs have fallen a full percentage point lower than comparable 30-year fixed loans.
• More house, better area: The lower payment means you can borrow more to get a larger or better-located house.
• Loan might get even cheaper: If interest rates decline when your fixed period is up, your monthly interest payment will also fall and potentially during resets in the years to come.

Cons

• Could cost much more in long run: The big risk of the 10/1 ARM is exposure to higher rates after the fixed-rate period expires. If rates have risen, your payment will increase, potentially putting a big dent in your finances.
• Added complexity: More moving parts to an adjustable mortgage than a fixed one means more possible gotchas. Rate caps, indexes, resets — this can be tough going for the average homeowner to navigate.
• Interest-only lure: Some ARMs let you only make interest payments and not principal in the initial period. That can allow you to stretch your budget and lower your payment, but after the fixed period your payments will be much higher to include the principal payments you missed. If home values fall like in 2007-2009, you might find yourself underwater on the loan.

Is a 10/1 ARM right for you?

Whether a 10/1 ARM is right for you largely depends on the initial interest rate you can negotiate, and how long you plan to stay in your house. Interest rates for 10/1 ARMs are generally lower than fixed-rate mortgages, because your lender can adjust your interest rate after the first 10 years.

That might not be a problem for long, however, since the average home is sold every 13 years, leaving you just three years to pay your variable rate. For this reason, a 10/1 mortgage might make sense for a lot of homeowners who have no plans to stay in the home much beyond the fixed period of the loan, because they’ll enjoy the lower interest rate for a decade.