Use the following tabs to switch between current local mortgage rates & our 10/1 ARM calculator which estimates adjustable rate mortgage loan payments.
This calculator will help you determine what your monthly payment would be under a adjustable rate mortgage (ARM) plan. First enter your mortgage loan amount, the beginning interest rate, and the loan term. Then enter the number of months before the first adjustment and the number of months between adjustments. Finish up by inputting expected adjustment percentages and an interest rate cap.
Press “Calculate Mortgage Payment,” and you’ll receive a breakdown of the costs associated with your ARM. For a printable amortization schedule, click on the available button and a new browser window will open.
The above calculator estimates core principal & interest loan payments, along with many other costs of home ownership like PMI, homeowner’s insurance & property taxes. The only major expense categories which are not included are property maintenance & the initial loan closing costs. Here is a description of expenses frequently associated with homeownership.
- Home Repairs: 0.5% to 2% of the home’s value each year. These expenses can be lumpy with major repairs like roofing replacement or septic tank issues coming up once per decade or so. Older homes tend to cost more to maintain than newer homes, but multi-unit dwellings that are built near the peaks of bubbles often end up having quality issues which get reflected into higher HOA fees.
- HOA fees: For home located inside an association these fees vary widely. Factors include amenities, build quality, building age & location. Anywhere from $150 to $800 a month can be common.
- Closing Costs: fees associated with verifying the property title, loan documentation & originating the loan. These can be paid upfront or rolled into the loan & typically range from 2% to 5% of the property value depending on factors including things like how many discount points you purchase and local governmental record keeping fees.
- Property Taxes: National average of around 1.25% of the property price. Hawaii is the lowest state at 0.32% while New Jersey is the highest state at 2.31%.
- Homeowner’s insurance: Roughly 0.35% of the home’s value, ranging from about $300 to $1,000 per year. Homes with a high risk of flooding or earthquake damage likely require additional policies which cover those risks.
- Property Mortgage Insurance: Required on conforming loans where the loan-to-value (LTV) is above 80%. This cost ranges from about 0.22% for 15-year loans with at least 15% down up to 0.62% for 30-year loans with 5% down. The reason the above calculator includes the home price field is if the LTV is at or below 80% we calculate the PMI value as zero.
Find Great 10-year ARM Loans
This Table helps homebuyers explore their mortgage options. You can click on the refinance button to switch away from purchase loans to refinancing options & other loan features are included in the filter section which let you change the loan amount, the home’s location, the downpayment on the home, the loan term & more.
Understanding ARM Loans
Adjustable-rate mortgages get their name from the fact that rates are variable & change over the life of the loan. Most ARM loans are structured as hybrid loans, where the a low introductory rate is offered for a fixed period of time & then the rates reset annually after the initial period.
A 10/1 loan means that the rate of interest & monthly payments will remain constant for the first 10 years of the loan, then the rate will reset each year thereafter based upon the performance of a reference index rate. As the benchmark index rate rises, any loan priced against it will rise as well. Mortgages are priced at a fixed margin above the reference rate.
The one-year LIBOR rate is the most frequently used rate for pricing mortgages, so if your loan is priced at LIBOR + 3% then if LIBOR jumps from 1.86 to 4.36 then the rate on your loan would shift from 4.86% to 7.36%.
Fixed vs Adjustable Loans
When interest rates are high or have risen rapidly borrowers can sometimes get a significant discount off of fixed rates by opting for an adjustable rate loan. In 1984 and 1994 adjustable-rate loans managed to make up the majority of newly originated mortgages reaching peaks above 60% and capturing nearly 70% of the market some months.
When interest rates are low there is a small gap between fixed & adjustable rates. That in turn promotes consumers choosing fixed-rate loans, as it removed their risk of interest rate shock in case rates rise, while still allowing them to retain the ability to refinance if rates fall further.
After the Great Recession interest rates plunged globally. Central banks engaged in quantitative easing to drive down core interest rates across the global economy & the Federal Reserve purchased $1.25 trillion worth of Mortgage Backed Securities (MBS) to further lower the spread between mortgage rates and the 10 year treasury notes.
Market conditions will change over time, but here is a table comparing the interest rates of various home loan products, and how those rates may impact the monthly payments & total interest cost on a $250,000 loan.
|Loan Type||3/1 ARM IO||3/1 ARM||5/1 ARM||7/1 ARM||30 YR FRM||15 YR FRM|
|Initial Monthly Payment||$683.33||$1,066.18||$1,107.32||$1,135.21||$1,169.17||$1,739.71|
|Maximum Monthly Payment||$1,907.38||$1,755.48||$1,760.27||$1,746.29||$1,169.17||$1,739.71|
|Average Monthly Payment||$1,754.32||$1,658.07||$1,624.64||$1,578.81||$1,169.17||$1,739.71|
|Initial Interest Rate (APR)||3.28%||3.09%||3.39%||3.59%||3.83%||3.11%|
|Maximium Interest Rate||8.28%||8.09%||8.39%||8.59%||3.83%||3.11%|
|Maximum Total Interest Expense||$381,555.35||$346,905.11||$334,871.64||$318,371.88||$170,899.13||$63,147.95|
The above table does not include other costs of home ownership including maintenance, insurance & property taxes. Those costs were stripped out in order to isolate the impact of interest rates & loan duration on payments. The above table presumes:
- 2/1/5 interest rate caps on ARMs, which are met throughout the duration of the loans
- The homeowner lives in the house for the entire period of the loan & makes regularly scheduled payments throughout the duration of the loan without refinancing.
10/1 Interest-only Loans
10/1 IO loans charge interest only for the first 10 years of the loan. Then when the 10 year point is hit the loan is recast to a traditional amortizing home loan which is repaid over the subsequent 20 year period.
Advantages of 10/1 ARMs
These loans are also popular among people who do not intend to live in the house for longer than the reset period & those who anticipate interest rates to fall before the reset period. The last United States recession lasted from December of 2007 until the second quarter of 2009. Since the end of WWII the average expansion has had a duration of 58.4 months. The current expansion is closing in on a decade, so we may experience another recession before the rate reset period.
These home loans have a low upfront payment which can enable young adults to qualify for homes they might not have otherwise been able to afford. One of the best ways to improve quality of life is to live close to work to minimize commute time. However houses tend to be expensive near many of the best jobs.
Disadvantages of 10/1 ARMs
As the above table shows, people using adjustable rates can pay a lot more interest over the life of the loan if interest rates rise significantly. That table shows the worst case scenario to show how much things can change, but for people who plan on living in their home for many years to come it probably still makes sense to lock in the current historically low rates with a 15 or 30 year fixed rate mortgage. The potential for the loan to cost ~ $500 more per month to save $30 per month upfront is not a particularly compelling risk/reward ratio for people who intend to live in the home for 30 years.
The vast majority of Americans are choosing FRMs over ARMs & this will likely remain the case until interest rates rise significantly from their current historically low rates. There is much less liquidity in the 10/1 ARM market than there is in shorter duration ARM loans & far less than there is in the highly-liquid 30-year FRM market.
|Year||Mortgages in Sample||30-yr FRM||15-yr FRM||Other FRMs||Non-FRMs|
Source: U.S. Bureau of Labor Statistics, 2004-2014 Consumer Expenditure Survey pooled sample.