The interest rate on adjustable-rate mortgages changes every six months after the initial fixed-rate period. During the first part of the fixed-rate period, the interest rate is usually low. When that time is up, changes could make the monthly mortgage costs go up. Most of the time, ARMs are best for people who want to refinance or sell their homes before the initial fixed interest rate ends. The difference between a 5/1 adjustable rate mortgage (ARM) and a 10/1 ARM is how long the interest rate is fixed at the start of the loan. Both of these loans have a variable interest rate and a fixed interest rate.

What's The Distinction Between Arms With Terms Of 5 Years And 10 Years?

5-year and 10/1 ARM are both hybrid mortgages because the first part of the loan has a fixed rate and the second part has an adjustable rate. For 5- or 10-year ARMs, the term "30 years" is often used. For the first five years of a 5-year ARM, you would get a fixed rate. Then, for the next 25 years, the rate would change every year. You get a fixed rate for ten years with a 10-year ARM. The rate will change for the next 20 years after that.

During the part of the loan when the rate changes, which happens every six months, both 5-year and 10-year ARMs change. Before lenders started using a new index called SOFR, adjustable mortgage rates changed once a year. Since then, they have changed more often.

ARM Rates for 5 Years vs. 10 Years

Adjustable rate mortgages appeal to many people who want to buy a home because they start with a low-interest rate. Some call these "teaser rates" because they are usually much lower than fixed mortgage interest rates. Different kinds of ARMs will start with different interest rates. In general, the fixed-rate period of an ARM is shorter; the rate at the beginning is lower. If you're looking at 5/1 ARMs and 10-year ARMs, the 5-year ones will probably have lower starting rates. But remember that this low rate will only last for the first five years.

It would be best to look at the caps when comparing mortgages with adjustable rates. These tell you how much your interest rate could go up or down at different points in the loan. They are usually written as a set of three numbers, like 2/1/5, and both 5-year and 10-year ARMs work the same way.

Initial cap

The first number shows how much the interest rate can change when the fixed-rate period ends, and the loan is adjusted for the first time. During the fixed time, your interest rate was 3.5%. If you have 2/1/5 caps, the first change can't be more than 5.5%.

Subsequent cap

When the loan adjusts every six months, the second number shows how much the interest rate can change. The periodic cap is another name for this number. If your rate is 5.5% and you can only raise it by 1% each time, the highest it can go in a single change is 6.5%.

Lifetime cap

The third number shows how much your loan's initial fixed interest rate can increase. Using the same example, if you have a fixed rate of 3.5% and a lifetime cap of 5%, the highest interest rate you could have on your loan during the time it changes is 8.5%.

Advantages Of A 5/1 ARM Loan

At first, the interest rate on a 5/1 ARM home loan is usually lower. This interest rate will stay the same for the first five years of the loan. During this time, you'll know exactly how much you have to pay on your home loan each month. But after this period, your payments might change. This is a great mortgage for people who only want to live in a house for a short time and plan to sell it before the introductory interest rate increases. The 5/1 ARM also has the lowest interest rate compared to the other types.

A 10/1 ARM's Advantages

With a 10/1 ARM home loan, the interest rate stays the same for 10 years. If you plan to live in your home for at least 10 years, a 10/1 ARM might be a better option. As interest rates go up, you might be able to get a lower rate on this loan, which could save you thousands of dollars over the life of the loan.

Should You Get An ARM?

If you use an ARM loan wisely, it can be a great way to save money. You should carefully consider your options when deciding which ARM loan product will meet your needs the best. Find out if you should get an ARM mortgage by talking to a New American Funding Loan Officer.