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10/1 ARM

What is 10/1 ARM and is it right for you?

The 10/1 ARM is a form of adjustable rate mortgage which allows for composite structures on the mortgage loan. The interest rate stays fixed for a decade. At the end of the ARM, the interest rate may rise or fall as depending on the market, though, the rate is only adjustable at one time each year. When it is time for adjusting the rate on the 10-year ARM in Colorado, the lenders utilize two figures, which include the margin and the index. The margin refers to the addition to the index covering the fees of the lender. It is normally applied during the initiation of the loan and remains static for the loan’s lifecycle. Individual lenders also determine it. The index, on the other hand, is a general indicator of the housing market that changes depending on particular factors including the number of prospective home sales and the conditions of the market as rated via the national association of home builders.

Lenders are adding the current market index figure to the margin to get the amount of the rate increase. The ARM presents certain advantages and disadvantages as such. The most significant benefit includes the fact the initial interest rating is mostly lower compared to a fixed-rate mortgage. Similarly, depending on the market, the interest rate would go lower after the initial phase. The unpredictable nature of the market as well may also cause the interest rates to increase, and that significantly affects the levels of the monthly payments to be given on average.

How to decide if the 10/1 ARM is the appropriate choice

According to most loan officers and financial advisors, clients often find a Colorado 10/1 ARM is the best of both worlds allegedly as it provides a lower interest rate than a 30 year fixed mortgage loan. Though with a higher level of stability than the 5/1 ARM it is recommended people ask a few questions to assist in deciding if the 10/1 ARM is the right alternative. As opposed to the question of how long one is going to live in the house, the borrower should ask themselves how long they are going to have with the mortgage. Similarly, a small percentage of homeowners have the same mortgage for more than a decade. That should help create a perspective that the 10/1 ARM is a viable option as compared to the longer haul fixed rate loan. The purchaser should also tabulate the figures on how much money they are looking to save using a 10/1 ARM as opposed to a 30 year fixed loan.

5/1 vs. 10/1 ARM considerations

The option of 5/1 ARM as opposed to the 10/1 ARM concerns timing. When picking the specific mortgage, the purchaser has to make a few predictions concerning the next five to ten years of their lives. They will have to consider if they will modify their careers or relocate for the job. The manner the borrower can reply to these, and any other queries might help in identifying the feasibility of the ARM according to the schedule that is currently present for the next part of the buyer’s life. Should one plan to begin an enterprise, then the 5/1 alternative is not the best avenue. The earnings one could be unpredictable for a time, and that makes it hard to deal with a significant mortgage fee in the event the fee is going to increase within the next part of their loan after the first five years are completed. Should the interest rates be higher after the first five years then the 10/1 ARM, or the fixed rate mortgage loan would be the cheaper and thus more favorable alternative.

Comparing the 10/1 ARM and 30-year fixed rate loan

The fixed rate loan is a customer favorite because of the apparent stability it gives the clientele. When the customer locks in their rate, the principal and interest rate payments remain the same which means there are zero surprises concerning the loan cost over time and make it that much easier to plan for the future. Currently, the difference between the rates of the 10/1 and the 30-year fixed rate is 0.125 percentage points at the most, and that means the long term rate may be considered slightly attractive as far as stability is concerned. Now the rates may go lower after the introductory phase is done and that means it is statistically advantageous to be with the 10/1 ARM than the fixed rate loan over 30 years.

Pros of the 10/1 ARM loans

  •    The 10/1 ARM allows for the best of both worlds. On the one side, the customer gets to have a taste of stability for a more extended period of time than the 5/1 approach, and they get to see how the market behaves so they can make a better decision about refinancing or not.
  •    When the first period is over, the rates may be at a low which is a benefit for the 10/1 ARM clients because they will reap the benefits that saving will provide, however, much of a gamble it is. The fixed rate mortgage loan customers will be stuck with their terms at this time and watch as others reap from the market.
  •    The ARM loan also allows the customer options to back out after a reasonable amount of time, which would be much more expensive for the fixed rate options.

Cons of the 10/1 ARM loans

  •    Like any adjustable rate mortgage, the 10/1 has a fair share of risk to it because the market may increase the rates after 10-years and make the client pay higher interest rates on their property for the duration of the loan. In this way, the customer is after that subject to the whims of the financial market.
  •    The ARM may come with a prepayment penalty which may be charged should the client sell or refinance the loan. If there is a plan to sell the home or refinance within the first ten years of the mortgage, then the customer needs to consult with the lender about getting a loan without these terms.