Choosing Between 10-Year ARM and 30-Year Fixed

Back when interest rates were hovering around historic lows, a 30-year fixed-rate loan could lock in once-in-a-lifetime savings. Almost nobody wanted a 10-year ARM.

Now, with rates back to historic norms and still rising, a 10-year ARM may look more appealing.

Could you save money by getting a 10-year ARM instead of a 30-year fixed? Yes, you could — if you know how to use this loan product.

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How does a 10-year ARM work?

Despite its name, a 10-year adjustable-rate mortgage — also known as a 10-year ARM — is still a 30-year mortgage. Your mortgage debt and interest will still be repaid over 30 years, unless you pay off or refinance the loan sooner. 

The loan’s interest rate won’t last 30 years, however.

In 10 years, the rate and payment will start to adjust, and it will keep adjusting, periodically, for the remaining 20 years of the loan.

So compared to a 30-year fixed, whose principal and interest payments never change, a 10-year ARM provides less certainty. This potential for change scares off a lot of borrowers — especially those borrowers who remember the housing collapse of 2008. 

But to be fair, the rate and payment could also decrease, depending on market conditions at the time of the rate adjustment. And, modern limits on ARM rate increases limit the borrower’s risk.

What happens after the 10-year fixed period?

When a 10-year ARM’s fixed-rate period expires, the loan’s remaining balance is essentially refinanced at a new rate. The new rate won’t be arbitrary. It will depend on the loan’s index and margin.

• Index rate: A current market rate that serves as the foundation of an ARM rate. A lot of older ARMs use the London Interbank Offered Rate (LIBOR); newer loans are more likely tied to the Secured Overnight Financing Rate (SOFR)
• Margin: The additional interest rate which is added to the index rate by the lender to cover its costs

Let’s say your ARM is indexed to the SOFR and that your lender charges a margin of 2%. If the SOFR is 3% when your ARM’s initial rate expires, your new rate will be 5% — which is the index rate (3%) plus the margin (2%).

In theory, there’s potential for the SOFR to rise much higher. Fortunately, today’s ARM borrowers aren’t exposed to this type of volatility, thanks to rate caps.

Rate caps and how they protect the borrower

Rate caps limit how much an adjustable-rate mortgage’s rate can increase. ARMs have more than one rate cap. Most have three:

• An initial rate cap: This cap limits how much your loan’s rate can change at the first adjustment (10 years). According to the Consumer Financial Protection Bureau, initial rate caps are usually set at 2% or 5%.
• A periodic rate cap: This cap sets a maximum increase for each adjustment period after the first rate change. With a periodic rate cap of 2%, an ARM’s increase couldn’t surpass 2% even if market rates had risen by 3% or more since the loan’s last adjustment.
• Lifetime adjustment cap: This cap limits how much the ARM’s rate can increase over the life of the loan. A lifetime cap of 5% means your rate could never be more than 5% higher than its introductory rate. So if your initial rate were 5.25%, the loan could never rise above 10.25%.

If you’re shopping for an ARM, be sure to compare rate caps along with introductory interest rates. Caps can have a bigger impact if you keep the loan past its introductory rate period.

Caps are communicated by a series of three numbers. A 2/1/5 cap means the rate could go up by 2% at its first adjustment period, 1% at each subsequent adjustment period, and no more than 5% over the life of the loan.

10-year ARM vs 30-year fixed

A 10-year ARM could save you money. Why? Because the 10-year ARM’s introductory rate is usually lower than the rate on a new 30-year fixed.

For example, let’s say you’re borrowing $350,000 to buy your new home. Here’s a payment breakdown for a typical 30-year fixed vs a typical 10-year ARM.

*Rates and rate spread shown are for example purposes only. Your rates will be different. Payments do not include taxes, insurance, or HOA dues.

As you can see, a 10-year ARM saved this home buyer $173 a month and more than $20,000 over the first 10 years of the loan.

Keep in mind these are sample interest rates based on current market conditions. Your rate will reflect your personal finances and will likely be different. But no matter what rate you qualify for, your 10-year ARM rate will likely be lower than your 30-year fixed rate.

How you can potentially save money with a 10-year ARM

Let’s be clear: There’s a really good chance your 10-year ARM payments will go up after 10 years. Depending on your rate caps and market fluctuations, your payments could go up a lot.

This is the risk you take with an ARM, but more borrower risk is one reason an ARM’s intro rate is lower than a 30-year fixed rate.

So how do you balance the potential for savings against the risk of paying more later? The easiest way is to get rid of the 10-year ARM within 10 years — before it has a chance to become unpredictable.

This isn’t as difficult as it may sound. In fact, most home buyers already get rid of their mortgages before 10 years pass. A 2021 National Association of Realtors report shows homeowners stay put for eight years on average.

Even when people stay in their homes longer than eight years, they’re likely to refinance before 10 years, and refinancing eliminates the ARM and replaces it with a new loan.

With this strategy, buyers can claim the savings of a 10-year ARM without risking higher mortgage costs once the rate starts changing.

10-year ARM pros and cons

10-year ARMs aren’t for everybody. Borrowers who want to sign closing papers and make payments without thinking about their mortgage debt should stick with a 30-year fixed.

Here’s a glance at the 10-year ARMs pros and cons:

Who is a 10-year ARM good for?

A 10-year ARM is a great fit for any home buyer who expects to sell or refinance within 10 years. These buyers can capitalize on lower rates without risking higher payments later.

This benefit can play out in two ways:

• Saving money: This one’s a no-brainer. Less interest and lower payments means you’ll spend less money to buy the same house. You could invest the savings or use the money to fix up the house
• Buying a better house: With an ARM’s lower rate, you could afford to borrow more money without increasing your payment. This could mean affording a more expensive house in a nicer area — and controlling a more valuable asset

Not 100 percent sure you’re going to sell within 10 years? Make sure you compare loan caps and margin rates since they’ll affect your future payments.

If you’re sure you’ll sell in less than 10 years, you may be able to save more with a shorter ARM. 

10-year ARM vs 5- and 7-year ARMs

Adjustable rate mortgages offer a variety of introductory rate terms. Along with 10-year ARMs, lenders offer 7-year, 5-year, and even 3-year ARMs.

Generally, the shorter the introductory period, the lower the rate. And, of course, the lowest rates save the most money.

Just like with a 10-year ARM, timing matters: If you’re sure you’ll be selling in three years, a 5-year ARM could be a perfect fit.

(Why 5-year instead of 3-year? Because it never hurts to have a little extra time in case the house doesn’t sell as quickly as you expected.)

10-year ARM alternatives

Standard adjustable-rate mortgages

• 3-year ARM
• 5-year ARM
• 7-year ARM
• VA adjustable-rate mortgage
• FHA adjustable-rate mortgage

Interest-only adjustable-rate mortgages

• 3-year interest-only ARM
• 5-year interest-only ARM
• 7-year interest-only ARM
• 10-year interest-only ARM

10-year ARM FAQ

Become a homeowner with a 10-year ARM

Compared to 30-year fixed-rate mortgages, 10-year ARMs are helping today’s home buyers save money and afford more expensive homes.

But, unlike fixed loans, ARMs don’t come with auto-pilot. Unless you sell or refinance, the loan’s initial rate will expire. If you’re not paying attention, the adjusted rate and payment might surprise you.

Still, a savvy borrower can get the best of both worlds with an ARM: Big-time savings without risking out-of-control house payments later.