Should I Choose a 10-Year Mortgage Over a 30-Year Mortgage?
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Richard Haddad Executive EditorClose
Richard Haddad Executive EditorRichard Haddad is the executive editor of HomeLight.com. He works with an experienced content team that oversees the company’s blog featuring in-depth articles about the home buying and selling process, homeownership news, home care and design tips, and related real estate trends. Previously, he served as an editor and content producer for World Company, Gannett, and Western News & Info, where he also served as news director and director of internet operations.
For most homebuyers and refinancing homeowners, the traditional 30-year fixed-rate mortgage is often the default loan option they use to purchase a house. But there are other types of mortgages and term lengths available. A phrase you might hear in real estate lending circles is “10 over 30 mortgage.”
But what exactly does choosing a “10 over 30 mortgage” entail, and how can it impact your homebuying plans and financial future?
In this post, we’ll decode this somewhat cryptic phrase and show you how it points to mortgage options you may not be aware of, including the 10/1 ARM, and 10/6 ARM, which offer lower interest rates for the first decade of your home loan.
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What’s the meaning of ‘10 over 30 mortgage’?
The term “10 over 30 mortgage” can refer to two distinct financing strategies for homebuyers.
1. Deciding on a 10-year fixed mortgage over a 30-year fixed mortgage.
2. Deciding on a 10/1 ARM or 10/6 ARM with a fixed rate for the first 10 years over 30 years.
In the coming sections, we’ll provide insights into both, but we’ll place our focus on the option of opting for a 10/1 ARM (adjustable rate mortgage) or a 10/6 ARM, where the interest rate is fixed for the first 10 years and then adjusts over the remaining 20 years of the 30-year loan term.
While a 30-year fixed-rate mortgage offers stability, a 10/1 ARM or 10/6 ARM might be more appealing due to the potentially lower interest rates in the first decade, presenting unique advantages and considerations.
Two basic types of mortgage rates
First, a quick review. When it comes to mortgages, there are two primary types to consider:
- Fixed-rate mortgages: These loans have an interest rate that remains constant throughout the life of the loan, offering stability and predictability in your monthly payments.
- Adjustable-rate mortgages (ARMs): These feature an interest rate that can change over time based on market conditions. Initially, the rate is typically lower than fixed-rate mortgages, which could change, increasing or decreasing your monthly payments.
What is a 30-year fixed-rate mortgage?
A 30-year fixed-rate mortgage is the standard for home financing, accounting for about 90% of home loans, according to Freddie Mac. It offers the security of a constant interest rate and monthly payments that never change, making it a preferred choice for most homeowners seeking long-term stability.
What is a 10-year fixed-rate mortgage?
A 10-year fixed-rate mortgage provides a way to pay off your home quickly. With this type of loan, you enjoy the consistency of a fixed interest rate and monthly payments that won’t change for a decade. This option is ideal for those looking to minimize interest payments and become mortgage-free in a shorter time frame. However, this creates the homeowner mind debate of: shorter loan term vs. higher monthly payments.
What is a 10/1 ARM mortgage?
A 10/1 ARM mortgage combines the initial stability of a fixed-rate period with the flexibility of an adjustable rate. For the first 10 years, your interest rate stays the same, offering predictability in your early payments. After this period, the rate adjusts annually based on the market, which can affect your monthly payments for the remaining 20 years of the loan term.
At a glance: Your mortgage has a fixed for the first 10 years (120 months) and then adjusts annually for the remaining 20-year term of the loan.
Why the name?: The interest rate adjusts every year, represented by the “1” in the name “10/1 ARM.”
What is a 10/6 ARM mortgage?
With a 10/6 ARM mortgage, your loan’s interest rate is fixed for the first 10 years, providing a decade of predictable monthly payments. After this period, the interest rate adjusts every six months for the remaining 20 years, offering a mix of initial stability and later flexibility. This option caters to those willing to take on the risk of fluctuating rates for the potential of lower initial payments.
At a glance: Your mortgage has a fixed for the first 10 years (120 months) and then adjusts by-annually for the remaining 20-year term of the loan.
Why the name?: The interest rate adjusts every six months, represented by the “6” in the name “10/6 ARM.”
Compare today’s 10 over 30 mortgage rates
- Compare current 30-year fixed mortgage interest rates at this link.
- Compare current 10-year ARM mortgage rates at this link.
Timeline illustration of a 10/1 ARM or 10/6 ARM
Below is a sample timeline illustrating key dates a buyer would want to monitor if they chose a 10/1 or 10/6 adjustable rate mortgage.
With either a 10/1 ARM or 10/6 ARM
- June 1, 2024: You close your loan with a fixed interest rate for the first 10 years
- June 1, 2034: Your interest rate adjusts up or down based on the connected index
With a 10/6 ARM
- Dec. 1, 2034: Your rate adjusts (bi-annually) until you pay off the loan, refinance, or sell the house
With a 10/1 ARM
- June 1, 2035: Your rate adjusts (annually) until you pay off the loan, refinance, or sell the house
Each time your interest rate changes, your required monthly mortgage payment can go up or down. Most lenders set a cap on how high the interest rate can go in those annual or bi-annual timeframes after the fixed rate period and over the life of the loan.
Compare 10/1 ARM with 30-year fixed mortgage
Let’s compare a 10/1 ARM with a 30-year fixed-rate mortgage using a loan amount of $350,000. The 10/1 ARM has an initial rate of 6.5%, while the 30-year fixed mortgage has a rate of 7%. Here’s roughly how the two compare over the first 10 years:
| 10/1 ARM | 30-year fixed mortgage | |
| APR | 6.5% | 7% |
| Monthly loan payment | $2,212 | $2,328 |
| Remaining principal after 10 years | $296,680 | $300,343 |
Source: mortgagecalculator.org
Over the course of the first 10 years, the 10/1 ARM results in a lower cost for the borrower, with significant monthly savings compared to the 30-year fixed loan. Not only does this mean saving around $116 each month, but it also allows the borrower to see a larger reduction in the loan’s principal balance.
However, after the initial 10-year period, the borrower faces a more unpredictable interest rate and monthly payment path with the 10/1 ARM. If the interest rate hits the lifetime cap of 11.5%, representing a total allowed maximum increase of 5%, the new monthly payment would jump to about $3,164.
Comparatively, the borrower on a traditional 30-year-fixed-rate mortgage would continue paying $2,328 per month. This example highlights the potential risk associated with an ARM, as monthly payments can significantly increase depending on interest rate changes after the initial fixed-rate period.
Some lenders offer other ARM options
- 7/1 ARM: Fixed rate for 7 years, adjusts annually for the remaining term
- 5/1 ARM: Fixed rate for 5 years, adjusts annually for the remaining term
- 3/1 ARM: Fixed rate for 3 years, adjusts annually for the remaining term
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How do I know which mortgage is best for me?
Deciding between a 10/1 ARM and a 30-year fixed-rate mortgage depends on your personal financial situation, future plans, and risk tolerance. Here are some insights to help you determine which type of mortgage loan might be right for you, based on various scenarios:
- If you plan to stay in your home for a long time: A 30-year fixed mortgage might be the better choice. It offers stability and predictability in your monthly payments, which can be comforting if you intend to make this house your long-term home.
- If you plan to sell or refinance your home sooner than 10 years: Consider a 10/1 ARM for its lower initial rates, especially if you’re fairly certain you won’t stay in your home for more than a decade. However, be mindful of any penalties for early repayment or refinancing terms, as they can vary between lenders. Understanding whether these penalties are hard (strictly enforced) or soft (more lenient) can influence your decision.
- If money is tight now but you expect better days ahead: A 10/1 ARM could provide you with lower initial monthly payments. This can be advantageous if you’re expecting an increase in your income in the future and can handle potential increases in your mortgage payments after the initial fixed-rate period.
- If you’re not sure how your finances will look in 10 years: Opting for a 30-year fixed mortgage could offer you peace of mind. The consistency in payment amounts can help you plan your finances better, without worrying about possible rate increases.
- If you expect to change your job or career in the near future: A 10/1 ARM might suit you better if you anticipate a significant income increase or if you plan to move due to job changes. The initial lower payments can free up funds for other expenses or savings as you transition in your career.
When choosing between these mortgage options, consider not only your current financial situation but also your future plans and potential changes to your income and living situation. Consulting with a financial advisor or mortgage broker can also provide personalized advice tailored to your specific circumstances.
Find a top agent and get started today
Whether you’re leaning toward a 10/1 ARM or 10/6 ARM for their initial lower payments or favor the predictability of a 30-year fixed mortgage, the key to making the right decision starts with finding the right guidance. Along with a financial advisor, a top real estate agent can provide invaluable advice, not just on choosing the right mortgage, but also on finding the perfect home that fits your budget and lifestyle.
Top agents understand the nuances of the real estate market and can connect you with trusted mortgage advisors who will help you understand your options, the application process, and how to secure the best rates. They’ll consider your long-term goals, financial stability, and any upcoming life changes to recommend the best path forward.
HomeLight can introduce you to the highest-rated agents in your buying location who can guide you every step of the way, from understanding your mortgage options to handing you the keys to your new home.
Header Image Source: (paulbr75/ Pixabay)
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