What does "10/1 Adjustable-rate mortgage" mean?

A 10/1 adjustable-rate mortgage (ARM) has a fixed interest rate for the 10 years. After this initial period, the interest rate can adjust once a year based on market conditions. This type of mortgage offers stability for a decade before potentially fluctuating payments.

A 10/1 ARM can be beneficial for borrowers who plan to stay in their home for the 10 years, as the interest rate remains fixed during this period. After 10 years, the rate adjusts annually based on market conditions, which can lead to lower payments initially compared to fixed-rate mortgages. However, there's a risk of higher payments in the future if interest rates increase significantly.

Adjustable mortgage rates for a 10/1 ARM depend on the index it is tied to, such as the 1-Year Treasury yield or SOFR, plus a margin set by the lender. For example, if the index is 3% and the margin is 2%, the rate would be 5%. Contact lenders for current rates.

To pay off a $400,000 mortgage in 5 years, you need to make monthly payments of approximately $7,500. This assumes a 0% interest rate; actual payments will be higher depending on your interest rate. You can also consider making additional principal payments to reduce the loan balance faster.