Do You Know About The 10 Year ARM Mortage?
The 10-year ARM loan is one that has a fixed rate through the first decade, but then the rate will change annually for the rest of the loan. Given how the interest rate can potentially change after the initial 10 years are up, that means that the monthly payment might also change.
The 10-year ARM is also called a 10/1 ARM; in either case, it’s a hybrid mortgage. A hybrid mortgage is one that combines features from both a fixed mortgage and an ARM, which stands for adjustable rate mortgage. It starts out with a fixed rate over a specific number of years; however, it will then change over to an ARM that has a changing rate each year for the remainder of the loan term.
In essence, an ARM is any mortgage loan where the interest rate changes or adjusts, typically annually. The advantage of any ARM is that they give you lower interest rates initially as compared to fixed-rate mortgages. On the other hand, an ARM will also mean the risk of an interest rate that will eventually go up.
10-year ARMs are typically tied to an index that determines just how much interest rates go up or down when the adjustment periods come up on the calendar. An index is usually an interest rate that is published based on specific classes of investments and their returns, like United States Treasury securities. These investments have rates which change as they respond to different market conditions, so an index usually tracks changes in either global interest rates or domestic rates.
In the case of a 10/1 ARM, that interest rate won’t start changing immediately based on an index. For instance, if you personally have a 10-year ARM, then your interest rate is going to be fixed for the initial decade of your loan. After that decade has passed, the interest rate might change annually for up to two more decades as the loan gets paid off. In the name of a 10/1 ARM, the first number represents the number of fixed-period years, whereas the second number represents the adjustment interval. The adjustment interval is the time period that happens between possible rate changes. In the case of a 10/1 ARM, that would be one year.
Hybrid mortgages can typically offer a lower rate of initial interest as compared to fixed loans yet their interest rates are still higher than many standard ARMs. A hybrid adjustable rate mortgage can give you the security of knowing exactly what your payments are going to be throughout the loan’s fixed period. In the case of a 10/1 ARM, you’ll know just what the interest rate is for the initial decade. After that is over, your interest rate and monthly payment might rise or fall.
Choosing A 10/1 ARM
Picking a 10/1 ARM might save you some money in regards to mortgage payment you have to make every month. For instance, assume you are buying a $200,000 home and that you’re putting 20 percent down. Once you borrow $160,000 with a 7 percent rate of interest, then your monthly payment for a 30-year fixed-rate mortgage is going to cost you $1,064.48 every month. A 10/1 ARM might get you into that very same house, but your payments will be lower, at least to start with. A 10-year ARM is going to possibly start you out at an interest rate of just 6.25 percent, which would make your first decade of payments only $985.15. On the other hand, once the fixed period of 10 years is over, then your interest rate might change based off the index. Due to this, it’s crucial to be sure that you’ll still be able to afford your monthly payments if the interest rates go up. Many 2/1 ARMs have various lifetime payment caps that limit just how much your interest rate might go up.
If you’re planning on refinancing or moving before the initial 10 years of the mortgage are up, then a 10/1 ARM might be good for you. Make sure you run the numbers to be sure that it makes sense to do. You have to be aware that some certain states to allow for prepayment penalties on hybrid ARMs. If you either refinanced your home or even sold it during the initial five years of the loan, then you might have to pay your lender the penalty fee. Find out any potential consequences from your lender, if there are any at all, of paying off your loan while it’s still in the fixed period.
Consider your options with care as you choose which particular mortgage product is the best one for you. The 10/1 ARM might be right for you if you prefer the security that a 30-year fixed offers but would like to benefit from the typically lower rates of an ARM.
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