10/1 ARM loans: Pros, cons and how to qualify

This article is for educational purposes only. JPMorgan Chase Bank, N.A., does not offer a 10/1 adjustable-rate mortgage (ARM). Any information described in this article may vary by lender.

Quick insights

Buying your first home is exciting, but when you start wading through all the acronyms and numbers, that excitement might fade.

Among the many terms you might encounter is the 10/1 ARM loan, a hybrid mortgage with its fair share of fans (and skeptics). If you’re curious about whether a 10/1 ARM loan might be a good fit for you, this guide will explain the pros, cons and some alternatives.

What is a 10/1 ARM mortgage?

A 10/1 ARM (adjustable-rate mortgage) loan is a type of hybrid mortgage that combines the stability of a fixed-rate period with the flexibility and risks of an adjustable-rate period. For the first 10 years of your 10/1 ARM loan, the interest rate is fixed. Once that period ends, your interest rate adjusts annually based on market conditions.

What is a 10/1 ARM with a term of 30 years?

A 10/1 ARM with a 30-year term is a 10/1 ARM loan where the total repayment period lasts 30 years. Of those 30 years, the first 10 years are at a fixed interest rate. After that fixed period, your loan enters its adjustable phase, with rates recalculating every year for the remaining 20 years.

This type of loan offers predictability upfront, followed by variability. Your monthly payments could go up, go down or stay the same, depending on market interest rates during the adjustable years.

You may also hear this loan referred to as a 10-year fixed ARM mortgage because there’s more stability in the initial 10-year period of this ARM’s fixed rates compared to other ARMs, like a 5/1 or 7/1. However, it’s somewhat of a misnomer, as it’s not a true fixed-rate mortgage and is still considered an adjustable-rate loan. Don’t confuse it with the 30-year fixed rate mortgage, as the two are very different.

Nevertheless, the ARM 10/1 loan can sometimes be referred to as a hybrid mortgage because it does have both of these fixed- and adjustable-rate periods.

How an ARM 10/1 loan works

For the first 10 years of a 10/1 ARM, your interest rate is fixed. This means your monthly payments toward principal and interest remain consistent. After the 10 years, the loan’s interest rate adjusts annually.

How rate caps work

To limit excessive rate increases, 10/1 ARM loans tend to include three types of caps:

What happens at the end of a 10-year ARM mortgage?

When the 10-year fixed period ends, your interest rate is recalculated every 12 months based on the index and margin. If rates have gone up, you’ll likely see a higher monthly payment. If rates have dropped, your payment typically decreases.

This annual recalibration introduces some unpredictability to your mortgage, so it’s smart to make sure you fully understand rate caps and can identify the maximum amount you would be expected to pay after the fixed rate period. Then, budget accordingly.

Differences between a 10/1 ARM and fixed-rate mortgage

Again, the biggest difference between a 10/1 ARM and a 30-year fixed-rate mortgage is predictability. With a fixed-rate mortgage, your interest rate and monthly payment remain constant for the entire loan term. This makes fixed-rate loans a go-to option for first-time homebuyers who plan to settle into their homes for decades.

A 10/1 ARM can appeal to those planning to upgrade eventually, especially if they want to take advantage of that lower initial rate.

Advantages of a 10-year ARM

Why would someone take on a loan with an adjustable rate, like a 10-year ARM? Here are some of the most compelling reasons:

Disadvantages of a 10-year ARM

While a 10/1 ARM has some undeniable perks, there are also some potential risks and drawbacks:

How to choose a 10/1 ARM loan

If you’ve decided that a 10/1 ARM loan is right for you, here are some tips to help you find one:

Evaluate your timeline

The main appeal of a 10/1 ARM loan lies in its affordability during the fixed-rate period. To make the most of this advantage, honestly assess how long you plan to stay in your home.

Are you buying a starter house with plans to upgrade within 10 years? Do you foresee a life event, such as a career relocation or expanding your family, that could prompt a move? If you’re confident your timeline matches the loan’s initial fixed-rate period, a 10/1 ARM might be a smart financial choice.

Understand your risk tolerance

As you now know, the adjustable portion of a 10/1 ARM introduces some level of unpredictability. After the fixed period ends, your monthly payments hinge on market interest rates, which can fluctuate significantly.

If you’re someone who prefers financial stability and doesn’t want to worry about potential payment surges, you might find this unpredictability stressful. However, if you’re comfortable taking on some risk in exchange for lower initial costs, a 10/1 ARM can offer meaningful savings early on.

Consider your financial goals

If saving money upfront is a key priority, or if you’re planning to direct the savings toward other goals—like home improvements or paying off existing debt—a 10/1 ARM can be an efficient way to manage your finances.

Think about how the lower initial rates will impact your financial plans and weigh that against how your budget might absorb potential rate increases during the adjustable period.

Research lender policies and rate caps

Not all 10/1 ARMs are created equal. Different lenders may offer varying terms, including different rate caps on the initial adjustment, annual increases and lifetime limits.

Be diligent in comparing offers from multiple lenders to find terms that provide flexibility without compromising peace of mind. Also, take time to understand the policies behind index rates, margin rates and recalculation periods, as this will help you make a more informed decision.

Plan for the future

Even if you intend to sell or refinance before the adjustable-rate period begins, a contingency plan can be helpful. Life’s uncertainties, from job changes to unexpected economic downturns, can disrupt the best-laid plans.

Make sure you factor in scenarios where market rates rise dramatically, and assess how your budget could withstand changes beyond the fixed-rate period.

Other types of mortgages to consider

Not sold on a 10/1 ARM? Here's a quick look at other mortgage options that may work for first-time homebuyers.

There are also many other adjustable-rate mortgages to choose from. The 5/1 ARM, for instance, offers a fixed rate for five years before there are any adjustments. The 7/1 ARM offers a fixed rate for seven years. There’s even a 5/6 ARM, in which the interest rate is fixed for the first five years and then adjusts every six months for the remaining term.

As you can see, the mortgage loan options out there are far from one-size-fits-all. Each type of loan comes with its pros and cons, so take the time to evaluate which aligns best with your needs.

Is it a good idea to have a 10/1 ARM?

Now that you know how it works, ask yourself a question: Will the savings in the first 10 years outweigh the potential rate hikes later?

If you’re confident you can sell the home, refinance or increase your income before the introductory period ends, a 10/1 ARM could help you keep more money in your pocket.

But if you’re planning to put down roots for the long haul, or market rate unpredictability makes you uneasy, you may want to consider a more stable option, like a 30-year fixed-rate mortgage.

In summary

For first-time homebuyers, a 10/1 ARM loan can offer a compelling pathway to homeownership, thanks to its lower initial payments.

However, take the time to weigh the risks alongside the benefits. Ask yourself how long you plan to stay in the home and whether you can handle fluctuating payments later on. Most importantly, how comfortable are you with some unpredictability?

Remember, there’s no one-size-fits-all mortgage. Take time to explore your options and consult with a mortgage advisor to understand your unique situation.

Want a competitive edge? Start your mortgage search early, and don’t forget to get preapproved to make your homebuying process smoother.