With adjustable-rate mortgages, the number before the slash is the period the interest rate is fixed, and the number after is how often the interest rate changes once the fixed-rate period ends. So, 10/1 means your rate is fixed for the first 10 years, and then adjusts annually after that.

The variable rate on an ARM is based on a benchmark, typically the Secured Overnight Financing Rate (SOFR). This rate fluctuates based on such factors as what’s happening in the global economy and how the Federal Reserve and other central banks are responding to those trends.

The rate that you have; adjusting can mean big changes to how much interest accrues, how much you owe and how much you have to pay every month. This makes it considerably different from a 30-year fixed-rate mortgage, which will have the same interest and principal payment every month for the life of the loan. Your rate can’t balloon out of control with an ARM, however — ARMs have caps, so your rate can only go up to a certain limit, outlined in your specific mortgage.

It is very important to think about your financial situation and what your goals are when considering an ARM. A 10/1 ARM may be a good idea if:

• You’re planning on moving within 10 years.
• You’re planning to refinance before the 10 years is up.
• You expect your income to go up before the ARM adjusts.

The great thing about ARM is that; you will have a lower introductory rate and monthly payments: A 10/1 ARM can come with a lower initial interest rate than that of a 30-year fixed-rate mortgage, resulting in lower monthly payments for the loan’s fixed period. However, your monthly payments might go up: The biggest drawback of an ARM is your interest rate going up when your rate adjusts, which can significantly increase your mortgage payment. If you plan to hold onto the loan after the first adjustment, you’ll need to budget for potential upward adjustments every year.

In conclusion, if rates are lower at the time your ARM adjusts, your monthly payment could fall. However, some ARMs have floor rates to limit how far the rate can decrease. A 10/1 ARM can be an appealing option if you’re unsure how long you’ll be in the home, allowing you enough time to sell or refinance to a fixed rate before your rate adjusts. This is why it is very important to do your homework before signing that dotted line.

When working with your mortgage broker be sure to ask questions, and make sure you understand the answers, and also make sure you know your options before making a decision.

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