10/1 Adjustable Rate Mortgage (ARM)

A 10/1 adjustable-rate mortgage (ARM) gives you a fixed interest rate for the first ten years. After that, the rate adjusts once per year based on market conditions. The adjustment formula uses the 30-day average SOFR (Secured Overnight Financing Rate) plus a 5% margin, with 2/2/5 rate caps that limit how fast your rate can move.

Most investors refinance or pay off the loan before the fixed period ends. For those who hold past year ten, here's exactly how the adjustment works and what it means for your payments.

Apply Online 888-375-7977

How Does the ARM Rate Adjustment Work?

During years one through ten, your rate stays fixed — same payment every month. Once the loan reaches year eleven, the rate begins adjusting annually based on a simple formula:

New Rate = Current 30-Day Average SOFR + 5% Margin

The margin is locked at closing and stays the same for the life of the loan. Only the SOFR index moves with market conditions. At each annual adjustment date, the lender checks the current SOFR value and adds the margin to calculate your new rate.

What are 2/2/5 rate caps and how do they protect you?

The 2/2/5 cap structure puts hard limits on how much your rate can change. Three separate caps work together:

Initial Adjustment Cap — 2%: At the first adjustment after the fixed period ends, your rate can increase by no more than 2 percentage points above the original start rate. Even if the fully indexed rate (SOFR + margin) is much higher, you're capped.

Periodic Adjustment Cap — 2%: Each year after that, the rate can move up or down by no more than 2 percentage points from the previous year's rate.

Lifetime Cap — 5%: Over the entire life of the loan, your rate can never exceed 5 percentage points above the original start rate. If you started at 6%, your rate can never go above 11% regardless of market conditions.

Rate caps prevent sudden jumps — your maximum possible increase is known from day one

Example: Year-by-Year Adjustment Timeline

Assume a 10/1 ARM with a 6.00% starting rate, 30-day average SOFR index, 5% margin, and 2/2/5 caps.

How does the payment get recalculated?

Each time the rate adjusts, your monthly payment is recalculated based on three factors:

• The new interest rate
• The remaining loan balance at the adjustment date
• The remaining term of the loan

The loan continues to amortize over the remaining years. You won't owe a lump sum at adjustment — just a recalculated monthly payment based on the new rate.

Should I refinance before the ARM adjusts?

Most investors don't hold through the adjustment period. The typical strategy is to refinance into a 30-year fixed rate loan or pay off the balance entirely before year eleven. If you're planning to hold the properties long-term, locking in a fixed rate eliminates adjustment risk altogether.

We recommend starting the refinance process at least 6 months before your adjustment date. That gives you time to get appraised, underwritten, and closed before the first rate change hits.

For investors with shorter hold periods — buying, stabilizing, and selling within 5–10 years — the ARM's lower initial rate compared to a 5 or 10-year fixed rate can save meaningful interest expense during the years you actually hold the properties.