The 10/1 ARM (Adjustable Rate Mortgage)

A 10/1 ARM is an adjustable rate mortgage where the interest rate is fixed for the first 10 years and then may adjust at the 121st payment (after the 10 year “fixed period” is over).

After the first adjustment on the 121st month, the rate will adjust annually on the anniversary of the first adjustment date.

How much the rate will adjust depends on the index, margin and caps with that specific ARM. Indexes, margins and caps can vary – so it’s important to check with your lender to see which ones apply to the specific mortgage you are interested in.

For example, one of the 10/1 ARMs that we have available at Mortgage Master Service Corporation with one of our jumbo programs has the following:

• Index: 1 Year UST CM/weekly. This is a weekly average yield of U.S. Treasury Securities adjusted to a constant maturity of one-year, as shown on the Federal Reserve Statistical Release H.15
• Margin: 2.750%
• Caps: 5/2/5

After the 1o year fixed period is over, the index at that time will be added to the margin to determine the new rate for the next year.

Caps limit how much the interest rate can change.

The new rate cannot adjust up or down by more than the first cap of 5%.  And it cannot be lower than the margin (sometimes referred to as “the floor”).

The “2” in the caps limits how much the rate may change on the anniversary dates (following the fixed period and the first adjustment) – no more than 2% up or down from the note rate.

The last “5” in the caps sets a ceiling for how how the rate may adjust over the lifetime of the loan. With this program, it can never be higher than 5% of the note rate.

Adjustable rate mortgages have wound up working well for many who had them with first adjustment dates during this time period when the indexes have been low.  If you’re not planning on retaining a mortgage or the home for more than 10 years, a 10/1 ARM may be worth your consideration depending on how the rates compare to other programs, such as the 30 year fixed rate.

I’m happy to review your mortgage options for your purchase or refinance of your home located anywhere in Washington state.