What is a 10/1 ARM?
The 10/1 ARM can be described as a type of adjustable-rate mortgage that allows for composite structures on a mortgage loan. The rate of interest in this type of loan stays fixed for ten years. At the end of the ARM, the rate of interest can rise or fall depending on the market forces, though, the rate is only adjustable at once annually. When adjusting the rate on the 10-year ARM, the lenders normally use two figures; the margin and the index.
The margin is described as the addition to the index that covers the lender’s fees. It is normally applied during the start of the loan and remains static throughout the term of the loan. The margin is normally determined by individual lenders. The index, on the other hand, is a general indicator of the housing market that changes depending on several factors such as the number of potential home sales and the conditions of the market as rated through the national association of home builders.
To get the rate increase amount, lenders normally add a margin to the current market index figure. The ARM has its advantages and disadvantages. The main benefit of the ARM the fact the initial interest rate is often lower compared to the fixed-rate mortgage. Likewise, depending on the market forces, the rate of interest would go lower after the first phase. The unpredictable nature of the market can lead to the rise of interest rates, and that significantly affects the levels of the monthly payments.
How to Decide if a 10/1 ARM is Right for You
According to most loan officers and financial advisors, borrowers often opt for the 10/1 ARM as it offers a lower interest rate compared to the 30-year fixed mortgage loan. Though with a higher level of stability than the 5/1 ARM it is recommended that borrowers ask a few questions and research more before deciding if the Arizona 10/1 ARM is the right option. As opposed to the question of how long one is going to live in the house, the borrower should ask themselves how long they are going to have with the mortgage. Likewise, a small portion of homeowners have the same mortgage for more than a decade. That should help develop a perspective that the 10/1 ARM is a good choice compared to the long term fixed-rate loan. The borrower should also tabulate the figures on how much money they are looking to save using a 10/1 ARM as opposed to a 30 year fixed loan.
5/1 vs. 10/1 ARM Considerations
The difference between the 5/1 ARM and the 10/1 ARM is the timing. When you are selecting the mortgage to use, you will have to make some projections about the next five to ten years. You will factor in of you will need to advance your career and relocate for the job. With answers to such questions, you will be in a much better position to determine the feasibility of the selected mortgage based on the schedule for the next five to ten years. If you plan on starting a business, then the 5/1 ARM is the ideal option. On the other hand, the 10/1 ARM is ideal when you project the interest rates be higher after the first five years. If your earnings are unpredictable, it becomes hard to deal with the high mortgage fees in case it increases after the first five years.
Comparing the 10/1 ARM and 30-year fixed-rate loan
The fixed-rate loan is preferred by many borrowers due to the stability it provides. When borrowers lock their rates, the interest rate and the principal will remain the same throughout and will not be affected by market forces than can lead to changing rates. This means that borrowers can plan ahead of time. At present, the main difference between the 10/1 rates and the 30-year fixed rate is 0.125% points. This means that the long haul rate is better as far as stability is concerned. Since the rates can go lower after the initial phase, it is, therefore, advantageous to use the 10/1 ARM loan.
Pros of the 10/1 ARM loans
The 10/1 ARM loan has numerous advantages. First, the borrowers get to have a taste of stability for the long-term period compared to the 5/1 approach. This means that they get to see how the market behaves so they can make better decisions on whether to refinancing or not.
When the initial period is over, the rates may be lower, which is a benefit for the 10/1 ARM borrowers because they will reap the benefits that saving will provide. Nevertheless, it is much of a gamble. The fixed-rate mortgage loan bs will borrowers, on the other hand, will be stuck with their terms at this time and watch as others reap from the market. The ARM loan also give the borrowers options to back out after a certain period, which would be much more expensive for the fixed-rate options.
Cons of the 10/1 ARM loans
Like any adjustable-rate mortgage, the 10/1 has a fair share of disadvantages to it because the market may increase the rates after 10-years and make the borrower pay higher interest rates on their property for the duration of the loan. In this way, the borrower is after that subject to the changes in the financial market.
The ARM also might come with a prepayment penalty which may be charged should the client sell or refinance the loan. If there is a plan to sell a home or refinance it within the first ten years of the mortgage, then the customer will be required to consult with the lender about getting a loan without these terms. For more information on the 10/1 ARM loans, our Arizona loan experts will assist you to make the best choice for your situation. Contact us today.