If you shop for a mortgage, you’re likely to encounter ARM loans as a tempting alternative to the typical fixed-rate mortgage. A 10/1 ARM is one of the most popular options, providing borrowers with a fixed interest rate for the first decade, followed by an adjustable-rate period to close out the term.
Here, we discuss everything you need to know about 10/1 ARMs: what a 10/1 ARM is, its advantages and drawbacks, and which types of homebuyers could benefit most from it.
What is a 10/1 ARM loan?
A 10/1 ARM loan is an adjustable-rate mortgage that offers a fixed interest rate for the first 10 years (which the “10” represents). After that, the rate will adjust annually (the “1” here stands for once a year) for the remainder of the loan’s term, usually 20 more years on a standard 30-year loan.
This structure is designed to provide borrowers with stability and slightly lower monthly payments in the early years of the loan compared to fixed-rate mortgages. However, one of the most significant drawbacks of ARM loans is the unpredictability that comes after the introductory period. Once the adjusted period begins, the interest rate can increase significantly based on the market conditions at the time, prompting monthly payments to rise accordingly. But it can also decrease, of course, which can save you more money.
How does a 10/1 ARM work?
Now, let’s explore in more detail how a 10/1 ARM would look for a homebuyer:
- Initial fixed-rate period: Also known as the “teaser” or “introductory” period, the first 10 years of the loan's life come with a predetermined rate that remains unchanged.
- Adjustment period: After 10 years, the loan’s interest rate changes and will continue to do so once a year for the remainder of the term. Lenders calculate the new rate using a benchmark index (typically SOFR or CMT) and adding a set margin to it. For example, if the index is 3% during your adjustment period and your margin is set at 2.5%, your interest rate would change to 5.5%.
To ensure the interest rates don’t increase or decrease too drastically, ARM loans usually have rate caps. 10/1 ARM loans have three types of such caps:
- Initial adjustment cap: Limits how much the interest rate can change the first time after the end of a 10-year period
- Subsequent adjustment cap: Controls how much the interest rate can adjust each subsequent year
- Lifetime adjustment cap: Sets the maximum and minimum interest rate that can ever be charged throughout the loan’s lifetime
Who should consider a 10/1 ARM?
While ARMs have a reputation for being risky, a 10/1 adjustable-rate mortgage is the least unpredictable option among them, as you get 10 years of lower-cost stability to start. This loan could be a smart choice for buyers who don’t plan to own a home for longer than 10 years or intend to refinance before the adjustment period kicks in.
Other ways to get a lower interest rate
If a lower initial interest rate is the main reason you became interested in ARMs, you have alternatives worth considering:
- Buy mortgage points: Purchasing points when applying for a mortgage can reduce your interest rate. This approach works best for long-term loans, since points tend to lower only the fixed portion of an ARM or the entire span of a standard fixed-rate loan.
- Improve your financial standing: Start working on your credit score and debt-to-income (DTI) ratio in advance. Sometimes, all it takes is avoiding a tempting new credit card offer or addressing any errors in your credit report to save thousands on interest rates.
- Compare lenders: Obtain quotes from multiple lenders, as rates and general terms can vary considerably depending on the chosen loan provider. What’s more, you can talk to your preferred lender and see if they’d be willing to match a lower rate you may have been offered at a different bank.
10/1 ARM: Pros and cons
If you’re wondering whether a 10/1 ARM loan is ideal for your situation, here are some key benefits and drawbacks to consider.
✅ Pros
- Lower initial rate compared to fixed-rate mortgages
- Extended fixed period compared to other ARMs
- Advantageous for those planning an earlier sale or refinance
❌ Cons
- Uncertain long-term costs
- Potential for a significant monthly payment increase after the end of the initial period
- Complex loan terms that may require more financial understanding
A 10/1 ARM loan provides a borrower with a decade of lower, fixed payments before rates start adjusting annually. Compared to other adjustable-rate loans, a 10-year fixed period offers more predictability and plenty of time to plan a potential move or refinancing.
That makes it a great option to consider if you’re attracted to the possibility of savings during the first third of the mortgage but don’t feel comfortable with the risks associated with a 5/1 ARM or 7/1 ARM.
10/1 ARM example
Here’s a simplified example of how a 10/1 ARM would work for a $500,000 home. Let’s assume the loan amount is $400,000, and the initial interest rate is 6%. After the teaser period ends, the rate increases by 1% annually.
| Years | Interest rate | Monthly payment |
|---|---|---|
| 1–10 | 6% | $2,398 |
| 11 | 7% | $2,664 |
| 12 | 8% | $2,949 |
| 13 | 9% | $3,255 |
As you can see, the monthly payment increased by almost $1,000 in three years after the end of the initial period. Before deciding on an ARM loan, it’s essential to understand how payment changes can impact long-term affordability. You’ll also want to have a clear exit strategy should a worst-case scenario occur.
10/1 ARM vs. 5/1 ARM vs. 7/1 ARM: Quick comparison
Does the concept of an ARM loan sound enticing, but you’re not sure which option to choose? Let’s look at the most common adjustable-rate mortgages and their unique benefits and risks.
| Loan type | Fixed-rate period | Characteristics | Best for |
|---|---|---|---|
| 5/1 ARM | 5 years | Lowest initial rateMost uncertainty after 5 years | Short-term owners |
| 7/1 ARM | 7 years | Two extra years at a fixed rateSlightly higher initial rate | Medium-term owners |
| 10/1 ARM | 10 years | Stability for 10 yearsHighest initial rates | Long-term owners |
The shorter the ARM, the better the interest rates the borrower will have during the introductory period. However, this also comes with more financial risks. If the rate increases significantly during the first years of your 5/1 ARM, you may need to consider selling or refinancing, which comes with additional costs.
Bottom line: Only get a 10/1 arm if you can refinance in a decade
A 10/1 ARM loan can be an effective tool for lowering monthly payments for the first decade of homeownership. It can be especially advantageous for those planning to move or refinance within the years before the adjustable period begins. However, it’s important to carefully assess your personal timeline and the potential for future rate shifts before committing to a 10/1 ARM.
Consult a financial advisor if you’re unsure which type of ARM loan is best for your situation. And if you need an experienced partner during your homebuying process, connect with top real estate agents on Clever.