Stewart Brown Jr – Mortgage Loan Originator – Purchase or Refinance
| An ARM is an adjustable rate mortgage. These loans are almost always presented as fractions: 5/1, 5/6, 7/1, 7/6, and so forth. The same goes for the 10-year ARM. Specifically, a 10/6 ARM is an adjustable rate mortgage that has a fixed rate for the first ten years and then transitions to an adjustable rate for the remainder of the loan term. The “6” denotes a rate reset every "six" months or biannually. This doesn’t necessarily mean you will pay more in interest; it just means that information from the relevant index + your margin will be applied to your loan every six months. Depending on the interest rate environment, your payment may remain the same, increase, or decrease. |
What is a 10-year ARM?
| An ARM is an adjustable rate mortgage. These loans are almost always presented as fractions: 5/1, 5/6, 7/1, 7/6, and so forth. The same goes for the 10-year ARM. Specifically, a 10/6 ARM is an adjustable rate mortgage that has a fixed rate for the first ten years and then transitions to an adjustable rate for the remainder of the loan term. The “6” denotes a rate reset every "six" months or biannually. This doesn’t necessarily mean you will pay more in interest; it just means that information from the relevant index + your margin will be applied to your loan every six months. Depending on the interest rate environment, your payment may remain the same, increase, or decrease. |
| The 10-year ARM will typically provide borrowers with a lower interest rate during the initial period. This can lead to the 10/6 ARM sometimes being a superior alternative to the 30-year fixed rate mortgage. The lower interest rate could reduce monthly payments, but it could also help you afford more home. The 10-year ARM may be ideal if you plan to sell your home after ten years. This could potentially allow you to lock in savings now just as the initial fixed rate is set to expire. Thus allowing you to sell your home and avoid the unpredictability of variable rates. A 30-year fixed rate mortgage offers no such advantage for those only planning to own their home for a short time. |
| The 10-year ARM will typically provide borrowers with a lower interest rate during the initial period. This can lead to the 10/6 ARM sometimes being a superior alternative to the 30-year fixed rate mortgage. The lower interest rate could reduce monthly payments, but it could also help you afford more home. The 10-year ARM may be ideal if you plan to sell your home after ten years. This could potentially allow you to lock in savings now just as the initial fixed rate is set to expire. Thus allowing you to sell your home and avoid the unpredictability of variable rates. A 30-year fixed rate mortgage offers no such advantage for those only planning to own their home for a short time. |
| While a 10-year ARM could deliver savings during the initial fixed rate period, once it transitions to the adjustable rate period the interest rate environment could be unfavorable. If your tolerance for unpredictability is not terribly high, you’d be better off with a fixed-rate mortgage. Many borrowers find comfort in paying off their purchase in steady increments without dealing with fluctuating market conditions. In a low-interest-rate environment, the difference between an ARM and a 30-year fixed rate may not be significantly wide. A 10-year ARM may be lower—but not by much. In such circumstances, a 30-year fixed rate can provide potential savings and peace of mind over a considerable time span. |
| While a 10-year ARM could deliver savings during the initial fixed rate period, once it transitions to the adjustable rate period the interest rate environment could be unfavorable. If your tolerance for unpredictability is not terribly high, you’d be better off with a fixed-rate mortgage. Many borrowers find comfort in paying off their purchase in steady increments without dealing with fluctuating market conditions. In a low-interest-rate environment, the difference between an ARM and a 30-year fixed rate may not be significantly wide. A 10-year ARM may be lower—but not by much. In such circumstances, a 30-year fixed rate can provide potential savings and peace of mind over a considerable time span. |
| - Initial interest rate cap For homeowners who have a 10/6 ARM, the monthly payment that could alarm them the most is the first mortgage payment adjustment directly following the 10-year fixed rate period. This is the initial interest rate adjustment and most lenders set a cap of 2%. This means the combined margin + index rate cannot rise more than 2% above your 10 year introductory fixed rate. - Periodic interest rate cap The second kind of interest rate cap for a 10-year ARM is the periodic or incremental rate cap. As you go from one six-month adjustment period to the next, your lender sets a cap on how much the mortgage rate can increase. This is frequently set at 1%. - Lifetime cap on interest rate Finally there is the lifetime cap on interest rate increases over the life of the loan. While this rate can vary amongst lenders, it’s typically set at 5%. The odds are slim that your 10-year ARM will climb to this 5% threshold. However, if rates were to rise abnormally high, caps are here to provide a safety net. |
| - Initial interest rate cap For homeowners who have a 10/6 ARM, the monthly payment that could alarm them the most is the first mortgage payment adjustment directly following the 10-year fixed rate period. This is the initial interest rate adjustment and most lenders set a cap of 2%. This means the combined margin + index rate cannot rise more than 2% above your 10 year introductory fixed rate. - Periodic interest rate cap The second kind of interest rate cap for a 10-year ARM is the periodic or incremental rate cap. As you go from one six-month adjustment period to the next, your lender sets a cap on how much the mortgage rate can increase. This is frequently set at 1%. - Lifetime cap on interest rate Finally there is the lifetime cap on interest rate increases over the life of the loan. While this rate can vary amongst lenders, it’s typically set at 5%. The odds are slim that your 10-year ARM will climb to this 5% threshold. However, if rates were to rise abnormally high, caps are here to provide a safety net. |
| The difference btween a fixed interest rate mortgage and an ARM (adjustable rate mortgage) is that the first has an interest rate that is fixed for the entire term of the loan whether that is 10, 15, 20, 25, or 30 years. Adjustable rate mortgages on the otherhand only have a fixed interest rate for a set number of years (5,7,10). After this introductory period, your interest can stay the same, rise or fall depending on market conditions. It’s best to talk to your loan officer about your specific situation to receive guidance. How long you plan to stay in your home, the current rate environment and future expectations and your stability of income all play key roles in determining which product is best. |
| The difference btween a fixed interest rate mortgage and an ARM (adjustable rate mortgage) is that the first has an interest rate that is fixed for the entire term of the loan whether that is 10, 15, 20, 25, or 30 years. Adjustable rate mortgages on the otherhand only have a fixed interest rate for a set number of years (5,7,10). After this introductory period, your interest can stay the same, rise or fall depending on market conditions. It’s best to talk to your loan officer about your specific situation to receive guidance. How long you plan to stay in your home, the current rate environment and future expectations and your stability of income all play key roles in determining which product is best. |
| Just as there are ceilings or "caps", there also exist floors. Long before the current era of plummeting interest rates, lenders protected themselves by establishing floors for adjustable rate mortgages, thus guaranteeing a minimum interest income in the event of dramatically falling interest rates. There are lifetime floors as well as floors that are applicable from one rate period to the next. Since lenders have different ARM terms, ask your lender if theirs have floors. |
| Just as there are ceilings or "caps", there also exist floors. Long before the current era of plummeting interest rates, lenders protected themselves by establishing floors for adjustable rate mortgages, thus guaranteeing a minimum interest income in the event of dramatically falling interest rates. There are lifetime floors as well as floors that are applicable from one rate period to the next. Since lenders have different ARM terms, ask your lender if theirs have floors. |
| After the 5,7, or 10 year introductory rate period, ARM rates are then primarily based off of two components:the index and the margin. The index is a benchmark interest rate that reflects general market conditions. These days most lenders use the SOFR or Secured Overnight Financing Rate on ARMs. The margin is a percentage set by your lender when you apply for your loan. The index and margin are added together to become your interest rate when your initial rate expires. |
| After the 5,7, or 10 year introductory rate period, ARM rates are then primarily based off of two components:the index and the margin. The index is a benchmark interest rate that reflects general market conditions. These days most lenders use the SOFR or Secured Overnight Financing Rate on ARMs. The margin is a percentage set by your lender when you apply for your loan. The index and margin are added together to become your interest rate when your initial rate expires. |
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