10 Year ARM
An ARM is an adjustable rate mortgage and, well, ten years seems simple enough so a 10 year ARM would be an adjustable rate mortgage that lasts for ten years you might think. Unfortunately, this would be wrong. The people working in the finance industry do like to have their little fun occasionally and throw a curve ball. The ten years actually refers to the length of time the interest rate is fixed, not the length of the loan.
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What happens in a 10 year ARM is that you take out a mortgage for some number of years usually 15 or 30. For the first ten years the interest rate and your monthly repayments of interest and principal will be fixed, so you’ll repay the same amount each month. After that 10 year period the interest rate (and thus the repayment amounts) will change, based upon whatever measurement has been used in the contract. It can be T-Bills, LIBOR, COFI, 6 month CDs (don’t worry, they are just different published indexes of interest rates) and then added on top the agreed in the contract margin for the mortgage loan lender.
The advantage of a 10-year ARM is that you know exactly what your payments are going to be for the next ten years, as you would in a fixed rate mortgage, but it will usually have a lower interest rate. This is because some of the risk of higher interest rates in the future (longer than ten years) is being taken by you, not the lender, so they give you a better price.
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Rates as of Sunday, October 12, 2008
| Institution | Rate % | APR |
|---|---|---|
 |
5.875 | 5.911 |
 |
5.875 | 6.033 |
 |
5.875 | 6.051 |