A 10-year adjustable-rate mortgage offers a fixed rate for the first 10 years of the loan. After that, the interest rate resets every six months based on market conditions. Because of this, many homeowners opt to refinance or sell their property before the rate begins to change.
So why bother with an adjustable-rate mortgage at all? The answer is simple: During that initial fixed-rate period, ARMs often come with significantly lower interest rates than fixed-rate mortgages. With a 10-year ARM, that's a decade's worth of a teaser rate. Here's what to consider if you're thinking about a 10-year adjustable-rate mortgage.
How does a 10-year adjustable-rate mortgage work?
A 10-year adjustable-rate mortgage is a hybrid mortgage. It has a fixed-rate for 10 years, then an adjustable rate for the remainder of the term. As with fixed-rate mortgages, 30 years is a common total loan term (the adjustable period usually lasts 20 years).
During that adjustable period, your 10-year ARM's interest rate will increase or decrease depending on prevailing mortgage interest rates. ARM interest rates use two components to determine the new rate: the margin and the index. The margin is a fixed percentage set by your lender, while the index fluctuates with market conditions. At each adjustment, the lender adds the index to the margin to determine your new interest rate.
When you are looking into 10-year ARMs, you'll see that lenders offer not only different interest rates but also differing parameters for how the loan will work. That doesn't mean your interest rate can change dramatically once the introductory period is up. Instead, there are caps that show you how much your interest rate might change. These are often presented as sets of three numbers, like 2/1/5.
Initial cap
The first number tells you the highest your interest rate could go the first time that it adjusts. In the 2/1/5 example, it's a 2, so the first adjustment can't be more than 2 percentage points. If you started out with a 3.5% interest rate, the highest interest rate your first adjustment could bring is 5.5%.
Subsequent cap
There are different names for this cap, but either way, the middle number represents how much your interest rate could change each time it adjusts after that first reset. With a 2/1/5 rate cap structure, every six months your rate can go up as much as 1 percentage point. Continuing the example, say you're at 5.5% — the highest you can go on your second adjustment is 6.5%.
Lifetime cap
The last number represents the maximum amount that your interest rate can reach over the course of your loan term. Five percentage points is a common lifetime cap. With our 2/1/5 example, assuming you'd started out with a 3.5% introductory rate, your lifetime cap would be 8.5%.
Knowing these caps can help you understand what happens if you keep your ARM past the first 10 years. You can also ask adjustable-rate mortgage lenders to calculate your possible payments at different interest rates.
Your interest rate could adjust downward if rates fall. That’s an advantage for ARM borrowers, because they can get a lower rate without refinancing. However, lenders may set a floor on how low your rate can go.
🤓Nerdy Tip
If you're looking for a 10/1 ARM, you might not find one. In 2020 and 2021, the benchmark interest rate used to determine adjustable mortgage rates changed from Libor to SOFR. From a borrower's perspective, the biggest difference is that SOFR ARMs adjust twice a year. As a result, lenders nowadays more commonly offer 10/6 ARMs.What are the disadvantages of a 10-year ARM?
Adjustable-rate mortgages, including the 10-year ARM, aren't a fit for every home buyer. Here are some of the drawbacks of 10-year ARMs.
Less predictability. Even knowing the caps and the floor, you don't know exactly what your monthly mortgage payment will be after the introductory period ends. You might decide you love the house and don’t want to move. If your budget can't handle the rate increases, that could be a problem.
Expensive to leave. If you're planning to move anyway, no big deal. But if you need to refinance to a fixed-rate loan or into a new ARM, you'll have to factor in the cost of refinancing. Refinance closing costs can come to 2% to 5% of the loan costs, which could potentially cancel out the savings from your introductory rate.
Higher introductory rates than 5-year ARMs. A 10-year ARM’s intro rate usually beats the rate on a fixed-rate mortgage, but not by as much as a shorter-term ARM would. A 5-year adjustable-rate mortgage will often get you the lowest introductory rate. Depending on the lender and market conditions, 10-year ARM rates might not be dramatically lower than some fixed-rate loan options.
» MORE: Compare 5- and 10-year ARMs
What are the advantages of a 10-year ARM?
Though you don't get the extra-low introductory rate of a 5-year ARM, having an extra five years to work with can give you time to make some serious money moves.
Greater buying power. Putting less of your monthly mortgage payment toward interest — at least for the first 10 years — could allow you to afford a higher-priced home without changing your homebuying budget. But bear in mind that after the introductory period, you'll have to contend with higher interest rates or find a way out of the loan. Refinancing to a different loan type is certainly an option, but closing costs can be budget-stretching, too.
Could be all the loan you'll need. If you plan to live in the home for less than 10 years, you can take advantage of the ARM's lower fixed interest rate without worrying about the adjustable period. As long as you stick with that plan, you could save money compared to choosing a different type of mortgage. If this is your forever home, however, another mortgage might be a better fit.
More time to pay down principal. For the decade when you've got that low interest rate, you could use any "extra" money to aggressively pay down your principal. When the ARM resets, or when you decide to refinance, you'll have a smaller mortgage balance. If you stick with the ARM, you're paying interest on a smaller sum. Choose to refi, and your closing costs — which, again, can be 2% to 5% of the loan amount — will be lower, since you're borrowing less.
» MORE: See today's 10-year ARM rates
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