Table of contents
- What is a 10/6 ARM?
- Adjustable rate loans: A high-level synopsis
- 10/6 ARM details
- 10/1 ARM: The original ARM
- 10-year ARM rates vs. 7-year ARM rates
- 10-year ARM rates vs. 5-year ARM rates
- 10-year ARM rates vs. 30-year fixed mortgage rates
- 10-year ARM rates vs. 15-year fixed mortgage rates
- When a 10/6 ARM makes sense
- When a fixed rate mortgage makes sense
- Advantages & disadvantages of 10-year ARM mortgages
- The math on a 10/6 ARM loan
- How to find the best 10-year mortgage rates*
Recently, both the underlying and customer-facing structure of adjustable-rate mortgage (ARM) loans have undergone an important transformation. Gone are the 10/1 ARMs; loans that readjust annually after the initial fixed-rate period of 10 years. In their place, lenders are now issuing 10/6 ARM loans—loans whose interest rates will now readjust twice a year (the “6” refers to six-month increments) over the remaining life of the loan.
This is an important distinction and potentially enables adjustable mortgage rates to fluctuate with greater frequency—to a good or bad effect. While there are a variety of adjustable-rate loans available today, this text will focus primarily on the newly minted 10/6 ARM loan, including 10-year mortgage refinance rates. We’ll explore the pros & cons of this type of mortgage and why obtaining a 10-year ARM could help you affordably finance your home.
When seeking a mortgage or a refinance, there are typically two main rate options available to borrowers: fixed-rate loans and adjustable-rate mortgages (ARMs). A fixed-rate loan is exactly what it sounds like—a mortgage whose monthly interest rate is the same over the life of the loan.
An ARM, on the other hand, allows for an introductory fixed-rate period before transitioning to an adjustable interest rate for the remainder of the loan. In that sense, it’s a hybrid; an initial fixed-rate period combined with a longer adjustable-rate period. The adjustable rate is based on the relevant index rate plus the margin that your lender provides.
This type of mortgage is designed with a mutual degree of built-in risk for both the borrower and the lender. A higher interest rate (with higher margins) benefits the lender while a lower interest rate benefits the homebuyer.
Depending on market conditions, an adjustable-rate mortgage could provide you with an improvement on existing rates that yield real savings. Of course, the inverse is equally plausible; increases in prevailing interest rates and an upward tick of relevant indices that produce higher monthly payments for you, but greater margins for the lender.****
Due to recent index changes in the financial sector, the industry has mostly decided to move on from 10/1 loans (except the small percentage of lenders who choose to employ the antiquated CMT T-bill index) and embrace 10/6 loans. In fact, the vast majority of adjustable mortgages going forward will reset every six months as opposed to an annual basis.
While there is little ambiguity during the first 10 years of an ARM, there are a few essential components worth clarifying when it comes to the adjustable-rate period—namely, how is it computed and how much could your rate go up as markets fluctuate.
How adjustable rate is determined
The adjustable rate is determined by two factors: the margin and the index. The margin is a specified percentage you’ve agreed to in your loan agreement and is set by the investor at the time of rate lock, while the index rate fluctuates daily due to market changes measured by SOFR (and before that, LIBOR).
Margin + index = fully indexed interest rate, or adjustable interest rate.
For example, Lender A might offer you a margin of 2.50% while Lender B offers 3%. If both lenders are also using the SOFR index—which on this day stands at 0.88%—Lender A’s fully indexed interest rate will be 3.38% and Lender B’s will be 3.88%. Since margins remain the same over the life of the loan, these differences can add up to thousands of dollars in additional payments.**
To reduce some of the inherent risk of ARMs for borrowers, lenders have embraced limitations on the charges they will pass on to customers as interest rates increase. These limitations are called interest rate caps.
Without caps, there would be no ceiling to how much your interest rate could increase at each adjustment, which would increase the amount of your monthly payment. the amount of interest you would owe the lender if interest rates increased. Caps are a necessary feature of most ARMs and they can be applied in multiple ways:
- Initial adjustment rate cap
- Subsequent adjustment rate
- Loan lifetime adjustment cap
Initial adjustment rate
After the fixed-rate period ends (which for a 10/6 ARM is 10 years or 120 payments), you enter the adjustable rate period. The first time your rate resets, it can only go up by a pre-established amount set by the lender—usually 2% or 5%. This is called the initial adjustment rate and it’s determined by the applicable rate index plus the margin outlined in your original loan terms. Since it could potentially be much higher than what you've been paying during your fixed-rate period, a cap is established to protect you from a sudden escalation in interest rates that would result in a significant increase in monthly interest payments.
Subsequent adjustment cap
After the initial adjustment period ends—6 months—a subsequent adjustment period begins with its own prescribed limitations on what interest rates can be charged. It’s typical for lenders to set a cap for 1-2%, meaning that the new rate cannot be more than 1-2% higher than the previous rate. Another way of looking at it is that it’s the lesser of the current index plus margin or the current interest rate plus cap.
Lifetime adjustment cap
To further protect borrowers from unreasonable interest rate trajectories, most lenders put limitations on how much additional interest can be charged over the life of the loan. It’s common for lenders to cap the overall rate adjustment at 5%, although it’s always important to check with your lender before obtaining an ARM.
Lenders often disclose these caps in shorthand percentages, often expressed (for example) as 2/2/5. These percentages translate to:
- 2% = The percent cap applied to your initial adjustment-rate period
- 2% = The subsequent percent cap applied to all other interest rate periods
- 5% = The maximum lifetime rate increase your loan agreement allows***
Interest rate floors
It should be noted that just as there are caps to protect you from a drastic rise in interest rates, there are “floors” to protect the lender from substantial drops. This means that even if the relevant index rate + margin has plunged well below your initial fixed rate, the interest rate on your mortgage will not necessarily decrease in kind. As you explore ways to obtain the best 10-year ARM rates, always talk to your lender to understand what the cap and floor are before you sign your agreement.
While it’s being replaced by many lenders due to the phasing out of the LIBOR index (see below), the 10/1 ARM has proven to be a popular and durable loan option over the years for many homebuyers seeking an attractive introductory rate. Similar to the 10/6 ARM, the 10/1 ARM is an adjustable-rate mortgage with an initial fixed-rate period of 10 years. Typically, this has meant that for these first 10 years, rates are offered at an interest rate lower than what would be available for a conventional 30-year mortgage. When the fixed-rate period concludes (after 10 years), the loan enters the adjustable-rate period.
During the adjustable period, 10/1 mortgage rates are reset once a year (hence, the “1”) over the remaining life of the loan. Mortgages, including ARMs, are usually issued in 15- and 30-year terms. This means that for a 10-year ARM, the overall adjustable period would either be 20 years for a 30-year mortgage (30 - 10 = 20) or five years for a 15-year mortgage (15 - 10 = 5).
LIBOR is out and SOFR is in
Recently, the financial sector has begun instituting an industry-wide change when it comes to adjustable-rate loans and the frequency that they will reset.
First of all, the index that has been chiefly responsible for determining interest rates for adjustable rates has changed. For many years, lenders relied on the London Interbank Offer Rate (LIBOR) to price loans for its customers. However, because its rate was calculated via forward-looking estimates from global banks, it was not always as accurate as many lenders and borrowers would have liked.
Enter the Secure Overnight Financing Rate or SOFR. This is a new index that is based on actual transactions in the Treasury repurchase market where investors offer banks overnight loans backed by their bond assets. By using secure financial transactions already collateralized by Treasury securities as a basis for determining rates, the expectation is that SOFR will be a more secure and reliable indicator of current market conditions and less prone to manipulation. Note: Most lenders intend to employ the SOFR index only for adjustable-rate mortgages.
Goodbye 10/1 ARM, hello 10/6 ARM
As the mortgage and banking industry switch away from LIBOR, many lenders are also changing the frequency of rate adjustment periods. In fact, if they want to do business with Fannie Mae and Freddie Mac, they have to. Because SOFR is a “backward-looking” index that uses past data to inform current rates, it’s necessary to recalculate mortgage rates more frequently to reflect market conditions—i.e., every six months rather than annually.
Homebuyers should increasingly expect to see ARMs advertised as 10/6, 7/6 and 5/6 as opposed to 10/1, 7/1 and 5/1. While this new schedule may be mildly perplexing to some prospective homebuyers entertaining an ARM, it’s best to think of the new six-month adjustable-rate periods as increased opportunities to potentially benefit from accurately tracked market conditions that may provide lower interest rates.
The 10-year ARM is just one of a few ARMs available to borrowers. Let’s see how it compares to another popular loan: the 7-year ARM.
7/6 ARM vs. 10/6 ARM
- Reduced interest rates: You can expect a slightly lower interest rate with a 7/6 ARM than for a 10/6 ARM during the fixed-rate period. Due to the fact that rates can change considerably in the adjustable rate period, markedly lower rates during the initial phase may provide an incentive to select a 7/6 loan.
- Advantageous for those planning to sell soon: Because the introductory or “teaser” fixed-rate period is relatively short (7 years), you don’t have to worry about confronting a possible rate increase in the adjustable-rate period if you plan to move soon. A 10-year ARM is also effective for such purposes, but the interest rate will be lower with a 7/6 ARM.
- Borrowers can conceivably afford a more expensive house: A 7/6 ARM may be preferable for individuals who want to purchase a slightly more expensive home. Because it boosts buying power, it may enable you to expand the list of possible homes you’re eligible to buy. A 10-year ARM provides more stability but less upfront purchasing power than a 7-year ARM. A home affordability calculator can also be helpful in determining affordability.
As adjustable-rate mortgages, these loans share many design features and appeal to many of the same borrowers.
The 5/6 ARM is similar to the 7/6 ARM, but it contains an even more limited fixed-rate period. Typically, the rates offered during this teaser period are lower than either a 7/6 or a 10/6 ARM. For those wanting to receive a great rate now and then sell or refinance into a fixed-rate mortgage after five years, this can be a particularly attractive option.
While 5/6 ARMs contain all the advantages of the other adjustable-rate mortgages stated above, they may move the needle in one area in particular. By providing the borrower with an extremely attractive fixed-rate period, the 5/6 loan may provide extra incentive for prospective first-time homebuyers to take the plunge of homeownership. This is because lower rates increase purchasing power, making any home more affordable. The savings on interest payments may enable a greater down payment and even the avoidance of private mortgage insurance (PMI).
Of course, a 5/6 ARM contains built-in risk on the backend. Let’s assume both loans have the same 30-year term. Because the 5/6 loan extends for a longer time into the adjustable-rate period than a 10-year ARM (25 years vs. 20 years), there exists a significant potential for rates to fluctuate in the ensuing adjustable-rate period. If rates rise significantly, you may struggle with the burden of much higher monthly payments.
The 30-year fixed-rate mortgage is one of the most popular loan options for prospective homebuyers, primarily due to the appealing consistency of set monthly payments. For individuals who can lock in a good interest rate, there’s peace of mind knowing rates will not change and that unpredictable market conditions will not dictate future payments.
The 10/6 ARM has by definition more built-in risk, but it may also yield greater savings under the right conditions. For example, a 10/6 ARM typically features a lower interest rate for the first 10 years than a conventional 30-year fixed-rate mortgage. After that time, the ARM may go up or down, creating an opportunity for either savings or higher payments depending on the SOFR index + margin. While caps are in place to prevent wild fluctuations, you could still end up paying more with a 10/6 ARM in years 10-30 than you would with a 30-year fixed-rate mortgage.
However, in an era when refinancing is readily available, most people don’t pay the same rate over 30 years regardless of fixed or adjustable rate. Being flexible and savvy enough to know the many options available to you is essential. Proactive moves, such as reaching out to your lender to discuss refinancing or other options, can mitigate the effects of semiannual rate adjustments over the life of your loan.
Secondly, choosing a 10/6 ARM and receiving a low introductory mortgage rate may provide the initial upfront savings needed to increase down payment and avoid paying PMI. It’s also worth noting that many people who choose an ARM are individuals who plan on moving after the fixed-rate period, thus eliminating the built in risk of adjustable-rate mortgages.
Interestingly, 15-year fixed-rate mortgages are even lower than most ARMs, and almost always lower than a 10-year ARM. You might think that this would make the 15-year fixed rate the obvious choice; however, you have to factor in an amortization schedule that mandates a narrower time frame to pay back the principal of the loan. This results in markedly higher monthly payments than a 10-year ARM part of a 30-year mortgage.
If you have a high income, you may be willing to trade off higher monthly mortgage payments for the benefit of a lower interest rate and a shorter time until you are debt free and own your home outright. For such individuals, a 15-year fixed-rate mortgage may be very appealing. Of course, talking to a trusted loan officer about your financial situation and inputting relevant information into a reliable mortgage calculator is the best way to compare the pros and cons of a 10/6 ARM vs a 15-year fixed-rate mortgage.
To be truthful, all available ARMs are hybrids and contain elements of both a fixed rate and an adjustable rate. However, the 10/6 ARM has the longest fixed-rate period, making it ideal for someone who wants to stay longer at their home yet retain the benefits of an initial low-rate.
Ten years also gives you plenty of time to better establish your finances, increase income and be prepared for any increases during the adjustable-rate period; likewise, homeowners may also decide to sell or refinance before the ARM kicks in. While there are many financing options available, a 10/6 ARM remains a popular choice for many who can tolerate a degree of risk. It sensibly combines upfront interest savings with a considerable period of fixed-rate stability.
As many loan officers can tell you, a fixed-rate loan offers the key advantage of steady predictable payments, and in the case of the 30-year fixed-rate mortgage, lower-monthly payments spread out over a 30-year time span. With a fixed-rate, you are protected from any wild swings in interest rates that could create undue financial strain.
To sum it up, there are some easily identifiable pros and cons to obtaining a 10/6 ARM.
Advantages of a 10-year ARM mortgages
- Long initial period of low interest rates that provide real savings for homeowners during the first 10 years of ownership.
- Initial lower interest rates may make it easier to qualify for a loan based on debt-to-income ratios.
- Interest rate caps that shield the buyer from dramatic increases in prevailing interest rates during the adjustable-rate period.
- Potential for lower long-term payments if market conditions produce a friendly interest rate environment during the adjustable-rate period.
Disadvantages of a 10-year ARM mortgages
- Potential risk for rate increase during the adjustable-rate period. Not every homebuyer is a good candidate for the unpredictable nature of market conditions and even small rate increases can result in thousands of dollars in extra payments over the life of the loan.
- ARMs contain underlying rules that can be complex and hard to understand for many borrowers.
- Prepayment penalties may apply. Many lenders have stipulations regarding homeowners who want to sell or refinance their property within the first five years of ownership. Check with your lender to see if this affects you.
Looking to better understand the potential savings of a 10/6 ARM mortgage? Let’s run through a comparison to see how it stacks up to a traditional 30-year fixed-rate mortgage.
Consider this, 10 years ago, Buyer A and Buyer B are both approved for a home that costs $300,000. Buyer A has chosen a 10-year ARM loan at 2.50%. Buyer B has decided to obtain a 30-year fixed-rate mortgage at a slightly higher 3%.
Buyer A: First 10 years of a 10/6 ARM
- Purchase price: $300,000
- Loan amount: $240,000 (assumes 20% down payment)
- 10-year ARM monthly payment: $2,262
- Total paid after 10 years: $271,440
Buyer B: First 10 years of a 30-year fixed mortgage
- Purchase price: $300,000
- Loan amount: $240,000 (assumes 20% down payment)
- 30-year fixed rate monthly payment: $2,317
- Total paid after 10 years: $278,040**
After 10 years, that decision to get an ARM loan saved Buyer A a total of $6,600
In this example, the savings difference between a 10/6 ARM after 10 years and a conventional 30-year mortgage is clear and substantial: For the initial fixed-rate period, Buyer A’s 10-year ARM will cost $6,600 less than the first 10 years of Buyer B’s 30-year fixed mortgage.
Of course, the savings of an ARM must always be tempered by the unpredictable nature of what happens after the initial 10-year phase of the loan. That’s where key differences may emerge. However, given the fact that 10 years allows plenty of time to plan for the future, many borrowers will refinance or sell their home, thus avoiding any negative consequences of the adjustable-rate period.
Buying a home is a big deal; it demands actionable research and thoughtful preparation to obtain the best 10-year mortgage interest rate and maximize savings.
Once you’ve decided to forge ahead with a purchase or a refinance, don’t forget to speak to a trusted mortgage professional who can help you with your application and answer and questions you have about the many mortgage products available to today’s homebuyer.
- *To understand the terms of repayment and review representative examples please review the information here.
- **Sample rate provided for illustration purposes only and is not intended to provide mortgage or other financial advice specific to the circumstances of any individual and should not be relied upon in that regard. Guaranteed Rate, Inc. cannot predict where rates will be in the future.
- ***Not including applicable closing costs, origination fees and other charges that may apply to both fixed-rate and ARM mortgages.
- ****Savings, if any, vary based on consumer’s credit profile, interest rate availability, and other factors. Contact Guaranteed Rate, Inc. for current rates. Restrictions apply.
- Sample payment does not include taxes, insurance or assessments. Mortgage Insurance Premium (MIP) is required for all FHA loans and Private Mortgage Insurance (PMI) is required for all conventional loans where the LTV is greater than 80%.
- Mortgage interest rates shown are based on a 60-day rate lock period.
- The displayed Annual Percentage Rate (APR) is a measure of the cost to borrow money expressed as a yearly percentage. For mortgage loans, excluding home equity lines of credit, it includes the interest rate plus other charges or fees (such as mortgage insurance, discount points, and origination fees). For home equity lines, the APR simply reflects the interest rate. When shopping for a mortgage, you can use the APR to compare the costs of similar loans between lenders.
- The estimated total closing costs above do not constitute and are not a substitute for a loan estimate, which includes an estimate of closing costs, than you will receive once you apply for a loan. The amounts provided above for Estimated Total Closing Costs, are estimations based on the state selected. This is NOT a mortgage loan approval or commitment to lend. The actual fees, costs and monthly payment on your specific loan transaction may vary, and may include city, county or other additional fees and costs.
- These mortgage rates are based upon a variety of assumptions and conditions which include a consumer credit score which may be higher or lower than your individual credit score. Your loan's interest rate will depend upon the specific characteristics of your loan transaction and your credit history up to the time of closing.
- For adjustable-rate loans, your monthly principal and interest payment will be fixed for a period of time, and then may change based on annual interest rate adjustments. Before choosing an ARM, you should decide if you can manage the maximum estimated payment if the rate increases. To fully understand minimum and maximum payments, please speak to a mortgage loan expert.