7/1 ARM: 7/1 Adjustable Rate Mortgage in Home Loans
What is a 7/1 Adjustable Rate Mortgage (ARM)
A 7/1 ARM is a kind of adjustable rate mortgage -- in this case, one that has a fixed interest rate for seven years. After that, the interest rate can change, usually depending on changes in the market interest rate. Like its cousins 3/1 ARMs and 10/1 ARMs, a 7/1 ARM is considered a hybrid mortgage because it has both a fixed-rate and a variable-rate interest period.
When is the right time to get a 7/1 ARM?
Much like other hybrid mortgages, 7/1 adjustable-rate mortgages are usually more popular when interest rates are low. For most borrowers, the whole point of getting a 7/1 ARM is to lock in a juicy interest rate for the fixed period -- but, if the fixed-mortgage rates out there are already looking sweet, there’s might not be a reason for you to risk dealing with a higher mortgage payment later.
How fast can my interest rate change with a 7/1 ARM?
For 7/1 ARMs (and all other ARMs with a “1” at the end), interest rates can be changed or adjusted, once a year. While that might sound extreme, there are also caps, or limits, on how fast the interest rate on an ARM can increase.
What are 7/1 ARM variable interest rates based on?
Just like other ARMs, 7/1 ARM variable interest rates are tied to a specific index, like the LIBOR, (London Interbank Offered Rate) which measures the rates at which banks in merry old England lend to each other. Other indexes include the prime rate, which is based on the rates at which American banks give each other loans.
Remember, the variable interest rate on your 7/1 adjustable-rate mortgage will only begin after the 7-year fixed-rate period, so you won’t have to pay these rates until then.
What is the margin on a 7/1 ARM?
In addition to that fact that your 7/1 ARM interest rate is based on a specific index, banks and other lenders add what’s called a margin to your loan. In this case, the margin is a specific amount of additional interest that covers the bank’s profit, as well as helps give them a little more security if you don’t make your payments on time (or don’t make them at all -- yikes!). For that reason, riskier borrowers may be assessed at a higher margin than safer ones.
For example, if your 7/1 ARM is based on the 12-month LIBOR rate, which, as of now, is about 2.3%, and the margin is 2%, you’d pay 4.3% during that 12-month period. For ARMs, margin rates remain fixed for the entire life of the loan -- so that’s one thing you don’t have to worry about increasing.
How much can the interest rates on my 7/1 ARM increase?
While it’s true that 7/1 ARMs are riskier than fixed mortgages due to the fact that the rates can go up significantly during the variable interest rate period, you shouldn’t sweat it too much. Why? Because there are limits to how much and how fast your interest rate can increase.
Just like other ARMs, 7/1 ARMs have what’s called a lifetime cap, which is the maximum amount of interest you can ever be charged on the loan. Plus, they also have a periodic cap, which is the highest rate that the lender can increase your interest rate during each 1-year adjustment period.