10/6 ARM or 10/1 ARM vs 30-Year Fixed Mortgage

One of the big questions when applying for a mortgage is whether to get a fixed-rate or adjustable-rate mortgage (ARM). Additionally, not all ARMs are the same. A 10/1 ARM mortgage adjusts once a year (after 10 years), while a 10/6 ARM adjusts every six months. All of these mortgages fit under the conventional loan category. 

There are situations when each can be the best choice. Below, you'll find the details, pros and cons to make the right choice for your needs. 

What Is a 10/6 ARM?

A 10/6 ARM is an adjustable-rate mortgage with a fixed interest rate for the first 10 years of the loan. Usually, these are 30-year loans, and the initial rate is lower than standard fixed interest rates at the time of loan approval. After the 10-year fixed period, the interest rate adjusts every six months according to a set rate and is tied to a standard index such as the Overnight Federal Funds Rate (abbreviated the Fed rate). For example, after the fixed term (10 years), your interest rate could be Fed +2%. 

10/6 ARM vs. 10/1 ARM

Both a 10/6 ARM and a 10/1 ARM are adjustable-rate mortgages with a 10-year fixed period. The difference is that after the fixed period, the interest rate on a 10/6 mortgage adjusts every six months, while the interest rate on a 10/1 mortgage adjusts once each year. 

Note that both 10/6 mortgages and 10/1 mortgages are usually 30-year mortgages. There are pros and cons to ARMs. While you might pay less in interest during the first 10 years, if interest rates rise significantly during that time, you could pay much more in interest long-term. 

It's difficult to predict what interest rates will do over a 30-year period, although many ARMs do have a stated maximum interest rate or cap.  These caps might be 2% per year and 5% over the loan's lifetime, but it's essential to check individual lenders' terms before choosing a loan. 

What Is a 30-Year Fixed Mortgage?

In contrast to an ARM, a 30-year fixed mortgage is a type of mortgage in which you lock in the interest rate and maintain it throughout the 30-year mortgage duration. While your taxes, homeowners insurance, or other fees might change over the course of 30 years, your interest rate remains the same. That means if you are locked in a 30-year fixed-rate mortgage with a 3% interest rate, even if average interest rates rise above 7%, you continue to pay the 3% interest rate.  

10/6 ARM or 10/1 ARM vs. 30-Year Fixed Mortgage

All three of these mortgage products are 30-year loans that allow you to purchase a home. If you plan to move from the house within 10 years, consider a 10/6 or 10/1 ARM. This gives you the benefit of a lower fixed interest rate without the risk of rising rates later. On the other hand, if fixed rates are high, you might get an ARM with the hope that interest rates will drop, but there's no guarantee.

Many consumers choose 30-year fixed-rate mortgages over ARM mortgages for the ease of budgeting. They know exactly how much they'll need to have ready each month. Even when interest rates are high, fixed rates guarantee that your interest rates won't rise higher. And there's always the possibility of refinancing if interest rates drop significantly. 

Example 10/6 ARM vs. 30-Year Fixed mortgage

Here is an example of a 10/6 ARM versus a 30-year fixed-rate mortgage for a $250,000 loan. Not that your monthly payments are lower, but you'll also be able to pay down more of the mortgage within 10 years. But, after that 10-year period, you'll lose that benefit if the ARM interest rate increases.

Should You Choose a 10/6 ARM or a 30-year Fixed Mortgage?

Here is an overview of what to compare when choosing between a 10/6 ARM and a fixed-rate mortgage. 

Initial Interest Rate

ARMs typically have a lower initial interest rate than fixed-rate mortgages but carry the risk of interest rates increasing, usually up to a cap of 5% to 6% above the starting interest rate. Also, while the ARM interest rate is lower, it is usually around 0.5% or less. 

Interest Rate Stability

Fixed-rate mortgages provide interest rate stability for the entire loan term, while ARMs can fluctuate after the initial fixed period. There are pros and cons to this. Right now, for example, with high interest rates, borrowers could choose an ARM hoping that later they can benefit from lower interest rates without refinancing. 

Affordability

ARMs may be more affordable initially due to lower interest rates but could become more expensive if rates rise. If you're starting out in your career or expect significant salary growth within 10 years, getting a 10/1 or 10/6 ARM can offer lower payments while you expand your income. 

Plans to Say in the Home

If you plan to stay in the home for a long time, a fixed-rate mortgage may be preferable for stability. However, there can be reasons to choose an ARM, even if you plan to stay there indefinitely, such as current high interest rates or possible career growth. 

Risk tolerance

ARMs have more risk due to potential interest rate increases, so it's important to consider your risk tolerance. For many borrowers, the stability of a fixed interest rate outweighs the possible benefits of an ARM. 

Find the Best Mortgage Lenders From Benzinga’s Top Providers

Whether you're looking for an ARM or a fixed-rate mortgage, check out Benzinga's top providers here. 

Choosing Between an ARM vs. Fixed Rate

Like so many financial decisions, there's no one-size-fits-all mortgage solution. Both ARMs and fixed-rate loans have pros and cons. Consider your financial situation, long-term housing plans, risk tolerance, earning potential, and current interest rates to choose the best type of mortgage for your needs. Remember to shop around and compare lenders' best offers to find the best rates and terms for your needs!

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