Points of Interest
A 10/1 ARM offers a fixed-rate interest period followed by variable rates that can change once per year. It’s less risky than a 5/1 ARM loan for people who want to build equity in their homes before refinancing to a fixed-rate mortgage.
Of all the adjustable-rate mortgages (ARMs) on the market, the 10/1ARM is the best choice for people who want to combine stability with cost savings. In general — but not always — 10/1 ARM rates are lower than rates on a 30-year fixed mortgage.
The total length of a 10/1 ARM loan is 30 years, so your monthly payment will be lower than if you opted for a 15-year mortgage. That gives you a full decade to build equity in your home so you can refinance to a fixed-rate mortgage or another ARM loan before the adjustable rate period of the loan kicks in.
The best 10/1 ARM rates aren’t always publicized, so you may need to go through the prequalification process before finding out exactly what the loan will cost. Still, the best 10/1 ARM lenders have a few things in common, including a reputation for good customer service and superb online capabilities.
The 5 best 10/1 ARM loan lenders of 2020
- Bank of America — Best for in-person lending
- Better.com — Best online lender
- New American Funding — Best for low interest rates
- US Bank — Best for homebuyers with excellent credit
- Guild Mortgage — Best for financing with a low down payment
What are 10/1 ARMs?
A 10/1 ARM is a loan that has a fixed interest rate for the first 10 years, followed by an interest rate that adjusts once a year. The entire loan term is 30 years, so you will pay interest at the adjustable rate for 20 years unless you sell your home or refinance. Although lenders call this type of loan an adjustable-rate mortgage (ARM), it is really a hybrid loan, with a fixed-rate period followed by an adjustable-rate period.
The main advantage of getting an ARM is lower monthly payments. In general, the shorter the fixed-rate period, the lower the interest rate. People who are buying a home they plan to sell within a few years, or people who expect their credit score and financial circumstances to improve over the course of a decade, are the best candidates for a 10/1 ARM.
Tip: Longer initial fixed-rate periods, like 10/1 ARMs, are ideal for people to want to build equity before refinancing so they can consolidate debt or pay for big expenses.
Why should I get a 10/1 ARM?
The best candidates for a 10/1 ARM are people who want slightly lower monthly payments than they would otherwise qualify for over the short term. The 10/1 ARM is not the best mortgage product for investors — 5/1 and 3/1 ARMs have even lower interest rates, making them cheaper for people who plan to turn over a property quickly — but they can be a great deal for people who need a decade to improve their credit enough to refinance to a competitive fixed-rate mortgage.
Tip: If you can afford to make extra loan payments during the initial loan period — even a single extra payment a year — you will reduce the principal on your loan and build equity faster.
10/1 ARM vs. 5/1 ARM
A 10/1 ARM has more stability than a 5/1 ARM, offering a full decade at the initial fixed interest rate. By contrast, the 5/1 ARM only remains at the initial fixed rate for five years, after which it will adjust once a year to a new rate. The advantage of 5/1 ARMs is that they generally have much lower interest rates than 10/1 ARMs — sometimes as much as a full point lower. If you are confident that you can refinance or sell your property within a 5-year period, a 5/1 ARM is a better option.
10/1 ARM vs. 15-year fixed mortgage
A 15-year fixed mortgage usually has lower interest rates than a 10/1 ARM. But lower rates don’t translate into a lower monthly payment. With a 15-year fixed mortgage, you commit to paying back the entire loan in a shorter period of time, so each month you’ll pay more than you would with a 30-year loan. In the end, you’ll shell out less interest as a reward for all that diligence. But if you need the lowest possible monthly payment, a 10/1 ARM is a better choice.
10/1 ARM vs. 30-year fixed mortgage
Because the initial fixed-rate period of a 10/1 ARM is so long, 10/1 ARMs do not always offer significant cost savings over the best 30-year fixed mortgages. In fact, sometimes the 10/1 comes with a higher interest rate. Moreover, with a 30-year fixed mortgage, you don’t have to worry about the rate adjusting. If you want a loan you’re going to hold on to long term, a 30-year fixed mortgage is a better deal — especially for people with excellent credit.
Tip: Because mortgage rates are constantly fluctuating, check current rates and use a good adjustable-rate vs. fixed-rate mortgage calculator to make sure you are actually saving money with a 10/1 ARM.
The final word
A 10/1 ARM is a good loan product for people who want lower monthly payments than they would be able to get with a 15-year fixed mortgage and plan to either sell their home or refinance. The 10/1 option is a solid choice for people who are committed to improving their credit score — the lower monthly payment lets you pay down revolving debt faster — and need time to build equity. The best 10/1 arm rates let you save money now so you can afford more later.