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The longer the initial period on an ARM, the higher the initial interest rate will be. Because the 10/1 ARM has a third of the mortgage's life locked into the initial "teaser rate," that rate is not going to be a lot different than the prevailing rate on a fixed rate mortgage. In fact, a survey of three lending institutions showed the 30 year fixed rate and the 10/1 initial rate to be the same.

The value of a 10/1 ARM may be that people with less than prime credit ratings can qualify for the ARM but not for a thirty year fixed rate loan. The national average for American families staying in a home is nine to eleven years. For many borrowers the 10/1 will be the same as a fixed mortgage because they will be moving before the interest rates adjust. If a borrower wants to lower the interest rate further and is not planning to be in the home long there are choices such as the 7/1 which will likely be .08% to .10% lower than the thirty year fixed rate; and the 5/1 which comes in at a little less than a quarter of a percent lower.

A 10/1 ARM can function as a fixed rate loan for young families who expect to be moving as their family grows. While the interest rate is going to be minimally lower than the fixed rate, a 10/1 will probably be easier to qualify for. A 10/1 ARM may also have a higher proportion of interest included in the early payments than with a fixed rate mortgage. That provides a larger tax deduction, although the development of equity is slowed because the principal is not paid down as fast as with a more conventional loan.

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