Mortgage Comparison – 10-Year ARM Versus 10-Year Fixed

Buying a home is certainly something that most folks don’t rush into. Agreeing to such a huge financial commitment can be both exciting and scary! That’s why choosing the right type of mortgage for your unique set of circumstances is critical. The number of different home loan programs out there is daunting to say the least. Although a 30-Year Fixed Rate mortgage is probably the most popular, there are more ways than ever to pay for what will likely be the largest single purchase that most of us will ever make.

Shorter term mortgages for example, are ideal for home buyers who wish to pay off their loan as soon as possible and are hoping to build equity fast. Ten year mortgages are worth considering if you’re hoping to be free of mortgage debt ASAP. But which mortgage rate option would be better for your situation – a 10 Year ARM or a 10 Year Fixed Rate Mortgage? In this post, we’ll compare both options and you can determine, with the help of your loan officer, which choice makes more sense for your needs and budget.

10 Year ARM
An Adjustable Rate Mortgage (ARM) comes with a variable interest rate. They are labeled, “3/1, 5/1, 7/1 and 10/1.” The first number in those figures represents the number of years that the rate will remain set. After that period of time is up, the interest rate will be subject to adjustment and can change once per year for the remainder of the loan. For example, the 10/1 ARM will have an introductory set interest rate for the first 10 years of the mortgage. After the 10-year period is over, the mortgage rate will be subject to change once per year for the remaining 20 years (or until the loan is refinanced or the home is sold).

As with all ARM loans, the 10 Year ARM does come with rate caps to protect borrowers in case rates increase radically. When you discuss the 10 Year ARM with your lender, make sure he or she explains the rate caps to you, so you know how much your monthly mortgage payment could be in the event that your rate reaches that cap.

Who could benefit from a 10 Year ARM?
ARM loans are considered an attractive choice for buyers who only want to own the home for a few years, such as those planning a move, retirement, or lifestyle change, such as starting a family, within the next 5-10 years. ARM loans in general can be a great way to save on interest during the early years of homeownership, but keep in mind that they are considered more risky.  However, of all the ARM loan options, the 10 year ARM may be the least risky. This is because the 10 Year ARM will come with a longer introductory set rate period. Instead of having only 3, 5 or 7 years with a set interest rate, you’ll enjoy a whole decade of lower, more predictable mortgage payments.

Taking advantage of the low mortgage rates that go into effect during the initial startup for an ARM are great for those that plan on owning the home only a few years. That way, a borrower can easily enjoy the perks of home ownership, lock in on an affordable rate for 10 years, and then move on before the rates go up.

What’s the biggest risk?
The biggest risk involved with a 10 Year ARM is the fact that your rate could increase after the first 10 years of your mortgage. Many people try to avoid this scenario by planning to sell or refinance before the set rate period expires. However, there’s no way to guarantee that you will be able to sell or refinance in time to avoid the rate change. Therefore, anyone considering an ARM loan should be prepared to make higher monthly mortgage payments just in case the need arises.

Also keep in mind that the interest rate for the 10 Year ARM may not necessarily be lower than those associated with the 10 Year Fixed Rate Mortgage. In fact, the 10 Year Fixed Rate Mortgage may have an interest rate that is considerably lower than the introductory set rate for the 10 Year ARM. Because mortgage rates change daily, it’s hard to say which will be cheaper in the future. The best thing you can do is evaluate both options with a trusted loan professional and determine which is best at that time.

10 Year Fixed
Although they come with a higher monthly payment, a 10 Year Fixed Rate Mortgage allows a borrower to build equity more quickly and save a lot on interest. Even though the monthly house payment is substantially higher than what it would be for a traditional 30 year mortgage, the interest rate for a 10 year loan is much less than for a 30 year mortgage.

Is a 10 Year Fixed Rate Mortgage Right for You?
The million dollar question is, “Can I afford such a large monthly payment?” Only you can determine if the higher monthly payment is feasible, but your mortgage lender, financial advisor and real estate agent can all offer expert advice on whether or not the higher payment of a 10 year mortgage makes sense for you.

Another important consideration is just how disciplined the borrower is. Being responsible for a shorter-term loan takes diligent planning and could require a homeowner to live a much more frugal lifestyle. One good thing to know is that with this type of loan the interest rate will not fluctuate. Whatever mortgage rate you lock in, is what you’ll have until you sell or refinance or pay off the loan. Keep in mind however, that although the interest will stay the same, the property taxes and homeowner’s insurance could conceivably change, therefore altering your overall monthly mortgage payment if you choose to pay these things in escrow.

In addition to the prospect of owning a home in just 10 years, a positive aspect of a 10 Year Fixed Rate Loan is that borrowers enter into this type of arrangement knowing full well what their monetary responsibility will be. A definite plus is that a shorter-term loan allows borrowers to pay off their mortgages more quickly. This type of mortgage, with its higher monthly payments also allows equity to accrue at a faster rate. Of course the wow-factor is the savings on interest!

What are the Risks?
There are a few concerns with a 10 Year Fixed Rate Mortgage. Agreeing to a mortgage commitment with a fixed rate loan means that hopeful homeowners will not be able to take advantage of lower interest rates unless they refinance. However, with fees and closing costs, refinancing may not always be affordable, at least in the early years of owning the home. The good news is, with a 10 Year Mortgage, you will likely be building equity at a much faster rate, therefore making it easier to refinance should the need arise.

Unerstand that every home buyer’s situation is different and there is no “one size fits all” home loan. In analyzing financing strategies for a home purchase, it’s always best to speak with an experienced, professional lender. Talk to one of our home loan experts today by calling 1-800-634-8616.