If you’ve decided to get a variable rate mortgage, the next step is to choose a term. The 5/1 ARM and 10/1 ARM are among the most common rate adjustment terms.

Adjustable rate mortgages have interest rates that adjust each year after an initial fixed rate period. The adjustments can increase monthly mortgage costs. ARMs are best for homebuyers who plan to pay off or refinance their mortgage before the initial fixed interest rate expires – for example, after 5 years with a 5/1 ARM and 10 years with an ARM 10/1.

What is an ARM 5/1 mortgage?

An ARM 5/1 mortgage is called a variable rate hybrid mortgage: it involves both fixed and adjustable interest rates. With an ARM 5/1, your initial or introductory interest rate remains unchanged for five years. After that, the rate will adjust once a year based on current market levels.

Once the initial fixed interest rate expires, ARM 5/1 rates can – and often do – increase, leaving you with a larger mortgage payment. ARM caps place limits on the magnitude of these potential interest rate increases, but they vary by loan and lender.

What is an ARM 10/1 mortgage?

A 10/1 ARM is another type of variable rate hybrid mortgage. With an ARM 10/1, your initial interest rate will stay the same for 10 years. After that, your lender can adjust the rate, depending on market conditions, on an annual basis.

Choosing an ARM 5/1 over an ARM 10/1 is a matter of timing.

Once the initial fixed interest rate expires, the 10/1 ARM rates are allowed to change. Sometimes they go down, but more often they go up and mean a much larger mortgage payment, like with a 5/1 ARM. If your lender has incorporated an ARM cap into your loan terms, this can give you an idea of ​​the magnitude of the interest rate increase.

5/1 ARM vs 10/1 ARM rate adjustments

Choosing an ARM 5/1 over an ARM 10/1 is a matter of timing. To choose the right loan, you will need to make predictions about the next five to ten years of your life.

  • Are you going to change careers or move for a job?

  • Are you going to get married and have a family?

  • Are you suddenly going to earn money, an inheritance or a settlement?

How you answer these and similar questions can help you determine if an adjustable rate mortgage is suitable, and if so, for what term.

If you’re planning to start a business, for example, an ARM 5/1 might not be the best. Your income can be unpredictable for a while, making it difficult to manage a larger mortgage payment if your rate goes up after five years. In this case, an ARM 10/1 or fixed rate mortgage could be better.

But if you’ve just got married and plan to wait a few years to have kids, an ARM 5/1 might be a good idea. You could enjoy low rates and low payments for the first few years, then sell and move to a larger home before the introductory rate expires and your family expands.

Other Considerations 5/1 ARM vs 10/1 ARM

While launch rate longevity may be the biggest difference between ARM 5/1 and ARM 10/1, it’s not the only thing to consider in your decision.

Other conditions that might affect your choice include:

  • Benchmark: The base interest rate which helps determine your ARM rate.

  • Interest rate limits: The limits on how much your rate can increase after the fixed period, each year and possibly over the life of the loan.

Make sure you understand these conditions, as well as the rate adjustment period, before choosing between a 5/1 arm and a 10/1 arm.