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What is a 10/1 Adjustable-Rate Mortgage and How Can it Save you Money?

What is a 10/1 Adjustable-Rate Mortgage and How Can it Save you Money?


Have you ever heard of a 10/1 ARM? Maybe in passing from an experienced mortgage lender or from a friend who used one to buy their house? No, it doesn't mean they had to give an ARM and a leg to purchase that home (which, in this economy, wouldn't be a surprise if they did!).  

ARM stands for an Adjustable-Rate Mortgage, which is an option for potential homeowners when buying a home. We'll explain exactly what an Adjustable-Rate Mortgage is, how it works, and why you should consider it as a loan option.    

What is a 10/1 Adjustable-Rate Mortgage (ARM)? 

This mortgage loan has a rate that will not change during the first 10 years; then, the rate will adjust once a year for the remaining loan term.   

What does “10/1” mean?  

With an ARM, the first number denotes the length of the unchanging rate in years, and the second number is how often that rate is adjusted annually after the end of the first term. This is how you get the 10/1, but there are other options, such as a 3/1, 5/1, and 7/1. In all these examples, Think of it like this:  

10 (years with the same rate) / 1 (rate adjustment per year for the rest of the loan term) 

If you choose a 10/1 ARM with a 30-year term, your loan is constant for ten years. Then, for the remaining 20 years, your rate would change annually. These loans generally begin with a discounted offering rate at inception. 

Real-life example: You are getting married and want to purchase a new house with your partner, but the current interest rates are beyond what you'd like to pay. You know that in a couple of years, your housing needs will probably change with your growing family, but you'd still like to have a place of your own right now.  
You decide to sign up for a 10/1 ARM with the standard 30-year term, with the realistic expectation that in the next ten years, you'll have sold your current home for something with more space. Using the 10/1 ARM, your mortgage lender could qualify you at a lower rate that will not change for the next ten years. 

How does it work? 

When using a 10/1 ARM, the mortgage lender can offer you (the borrower) a lower interest rate recognizing that life changes significantly over those same ten years. Essentially, you will be getting the same low rate for the first ten years. This is great if you plan on moving within ten years, which is on par with the National Average of 8 years, according to data by ATTOM Data Solutions.   

After the initial rate period, rates will adjust once per year. This newly adjusted rate is determined by taking the index (a rate set by the Feds, called the 1-Year Treasury Note) and then adding a margin percent set by your mortgage lender (Atlantic's is 3%). Even with this new rate, loans come with 'caps' that help offer borrowers safety. At Atlantic, the cap is 2/5, so the rate will not adjust more than 2% at the first change and not more than 5% over the life of the loan.  

Is a 10/1 ARM right for me? 

Like most things in life – it depends!  

Life changes like marriage, divorce, children, career advancement, etc. can change the path people assume they will take and may require a change in living arrangements such as a sale of the home, a refinance for improvements, moving into a larger home, or downsizing. If you anticipate any changes within the next decade, choosing a 10/1 ARM can provide you with a lower rate until it's time to move again. 



Can get a lower interest rate than fixed-rate mortgages in today's market 
Payments may increase when the term ends 
Can save money in the initial rate term (10 years) 
Not for potential rental properties (will likely exceed the initial 10-year term) 
After the initial rate period, there is a cap to how much the rate can change 


For people who don’t want to live in the new home for more than 10 years 



Key Takeaway 

When faced with a rising rate environment, borrowers are forced to consider alternatives to bridge their housing needs. Recognizing that needs change, you can save considerably on your home loans by taking advantage of adjustable-rate mortgages. Choosing a 10/1 ARM allows lenders the ability to offer buyers a lower interest rate initially, which helps save money in a real estate market where interest rates are trending upwards. 

When buying a home, you have options. That's where we can help. If you're interested in knowing all your options when choosing a mortgage, talk to an Atlantic Mortgage Expert today! When it comes to loans, our mission is to say "Yes!". 


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