Interest Only Adjustable Rate Mortgage

San Francisco Federal Credit Union has a home loan product that offers significantly lower initial payments on a home mortgage loan. The interest only adjustable rate mortgage provides a significantly lower initial payment for the first 10 years of the loan.

  • 10 year interest only 10/1 ARM loans up to $3,000,000
  • 40 year loan term
  • Fixed rate interest only payments for 10 years 
  • Principal and interest payments for the next 30 years to fully payoff the loan
  • Annual rate and payment adjustment during the 30 year amortization period
  • Available for properties in all nine Bay Area counties
  • Eligible properties include single family residences, townhouses, condos, and multi-family 2-4 units
  • Available for the construction of accessory dwelling units (ADUs)


Why did we create a 10-year interest-only 10/1 ARM loan?

We were seeing many people interested in home loans, who are qualified in every way but wanted to lock in a lower initial fixed-rate payment to free up their cash for other purposes.

What type of loan is a 10-year interest-only 10/1 ARM loan?

The “Interest-Only Adjustable Rate Mortgage” is a loan where the loan payments are “interest” only for the initial 10 years of the loan. During this initial period of 10 years, the interest remains fixed. After the initial interest-only period, the interest rate will adjust every year for thirty years and the payments will be the fully amortizing term for a total of 40 years.

During the 10-year initial interest-only period of the loan, monthly payments of interest only will be based on the outstanding balance of the mortgage. While borrowers are not required to make additional payments towards the principal of the loan during the first ten years they may, at their discretion, do so. If they pay additional principal payments, this will reduce the outstanding balance, and they will pay less interest over the life of the loan. If they choose not to make payments toward the principal it will not reduce the principal balance during the 10-year interest-only period of the loan. Starting in the 11th year of the loan, monthly payments of principal and interest will be established with an amount sufficient to completely repay the unpaid principal balance, at the current interest rate, by the end of the 40 year term.

How is the initial interest rate set?

The Initial Interest Rate for the first ten years of the loan is established prior to closing at the time of rate lock. The Initial Interest Rate is not based on the Index used to make later adjustments. The Initial Interest Rate may reflect a discount or premium. Please ask us about our current Initial Interest Rate and our current interest rate discount premium.

What is the index?

The Index is the weekly average yield on United States Treasury securities adjusted to a constant maturity of one year, as made available by the Federal Reserve Board. To compute adjustments to the interest rate, the noteholder will use the recent Index figure available as of 45 days prior to the Change Date.

Are there prepayment penalties?

No, there are never any prepayment penalties on any loan with San Francisco Federal Credit Union. Loans can be paid off at any time without incurring a prepayment penalty. Payment amounts that exceed the monthly payment due each month can be applied to principal reductions. This includes interest-only payments during the initial 10-year period, interest and principal payments during the amortizing period starting in year 11.

For payments that include impounds for taxes and/or insurance, those amounts would need to be included in the monthly payment. Any amount in excess of that payment due could be applied to the principal without penalty.

What types of properties are eligible?

The 10-year interest-only ARM loan is available for single-family homes, condos, town-homes, and 2-to-4 unit multifamily dwellings.

Can I refinance an existing mortgage with a 10-year interest-only ARM loan?

Yes, the 10-Year Interest-Only ARM loan is available to refinance an existing mortgage loan.

Will the 10 Year Interest-Only 10/1 ARM use negative amortization?

No. During the interest-only period, payment of the entire amount of interest due is required each month. No interest due may be applied to the principal balance.

Who can apply for a 10-year interest-only 10/1 ARM loan?

All applicants must qualify for membership in San Francisco Federal Credit Union and be at least 18 years old. Applicants must be able to show proof that they live, work goes to school, or worship in San Francisco and San Mateo counties.

Eligibility for the 10-Year Interest-Only 10/1 ARM loan also depends on a number of additional factors, such as credit scores, income, employment status, and property value and eligibility.

Are the loan payments fixed during the 10-year Interest-Only period?

No. The interest rate will not vary during this 10-year period. The first 120 monthly payments will consist of interest on the unpaid principal balance plus additional payments if requested or required for tax and insurance payments. If the interest payment is made each month, the payment amount will remain the same. However, if additional payment above the interest-only payment is made in any month during the initial 10-year period, the principal balance will be reduced by the amount of the payment exceeding the interest due. The reduction in the principal balance may reduce the interest payment due for the following month.

How does the interest rate change?

Starting after year 10, adjustments to the interest rate will adjust annually based on the changes to the index that is added to the margin on the loan. The index, margin and remaining loan balance will determine the new monthly payment. After the 10th year, the interest rate may change a maximum of 2% at each adjustment. These adjustments are also subject to a minimum rate based on the initial fixed-rate, and a maximum rate of not more than 6% above the initial loan rate.

How does the monthly payment change?

The monthly payment can change after ten years and every year thereafter. After ten years, the required monthly payments will include both principal and interest in an amount sufficient to full amortize the unpaid principal, at the new interest rate, over the remaining term of the loan. The monthly payment will change every year based on the interest rate and the unpaid balance at that time. Changes in the monthly payment will occur one month following the interest rate change. The monthly payment could increase or decrease substantially depending on changes to the interest rate or principal balance.

The monthly payment can also change during the initial 10-year interest-only period of the loan. Payment amounts that exceed the interest due for the prior month will reduce the principal balance. The reduction in principal balance may reduce the amount of the next payment.

Escrow accounts to pay for real estate taxes and/or homeowners insurance may also create changes to the monthly payment amount.

What California counties must the property be located in order to be eligible?

San Francisco, San Mateo, Alameda, Contra Costa, Marin, Napa, Santa Clara, Solano, and Sonoma.

Are taxes and insurance required to be paid with the mortgage payment?

No. However, requests may be made so that taxes and insurance payments may be paid by establishing an impound or escrow which will pay the annual taxes and insurance when they become due. The impound/escrow payment is paid each month with the regular interest-only or principal and interest payment on the loan.

Do you charge additional fees for the 10 Year Interest-Only 10/1 ARM loan?

Standard application and loan fees apply for the 10 Year Interest-Only 10/1 ARM loan.

What other home loan options does San Francisco Federal Credit Union provide?

San Francisco Federal Credit Union offers a wide variety of conventional and jumbo home purchase loans available to members with no restrictions on geographical work area and with higher loan-to-value financing up to 95% (certain restrictions may apply). If you would like more information about any home purchase programs the Credit Union offers, please feel free to call us at 415-359-2977 or email us at [email protected].

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