10 Year Adjustable Rate Mortgage
A mortgage can be one of the biggest purchases you make in your life. We don’t usually think of a loan as something we’re buying but you pay for it every time you make a monthly payment. Doing some research up front can save you money in the long run.
Often the amount of the monthly payment is the number that everyone focuses on. With a fixed rate mortgage, that monthly payment won’t change over the entire term of the loan. The first payment you make is the same amount as the last payment you make, thirty years later.
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But many of us don’t plan on living in the same home for 30 years. If you sell your home after a short time, it might save you money to take out an adjustable rate mortgage (ARM).
To understand the total cost of an ARM, here are the questions you need to answer:
- How long will the initial rate be fixed?
- How often will the rate be adjusted?
- What is the cap on each adjustment?
- What index is the rate tied to?
- What is the margin on the that index?
- What is the maximum rate that can be charged?
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When a lender talks about a 10 year ARM, they’re referring to the answer to the first question. With a 10 year ARM, the initial rate will be fixed for 10 years.
The longer the initial rate is fixed, the more you’ll pay on that initial rate. Generally, a 1 year ARM and a 5 year ARM will have a lower rate than a 10 year ARM. But the banks never give out money for free.
It’s pretty safe to assume that interest rates will go up over the next few years. Rates have been at historic lows. If you have a 1 year ARM or a 5 year ARM, that low rate will probably go away the first time the rate is recalculated.
No one knows where rates will be in 10 years. Fixing the rate for a longer period of time, might save you money in the long run. Also, people own their homes for an average of 7 years. If you have a fixed rate for 10 years but sell after 7, you never have to face the higher rates. Of course, chances are pretty good that your new loan will be at a higher rate but that is unavoidable.
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