7/1 ARM: 7/1 Adjustable Rate Mortgage
What is a 7/1 ARM?
The 7/1 ARM is a hybrid mortgage, it comprises years with a fixed interest rate followed by years with a variable rate. The “7” is the number of years with a fixed interest rate, the “1” represents the annual adjustment period.
The variable interest rate is a function of the underlying index rate and the lender’s margin. The index rate is the market cost of borrowing for the lender such as the fed fund rate, treasury bill or the LIBOR. Over time the change in the index is what will make the overall interest rate charged by the lender change. The margin that the lender will charge on top of the index is at their discretion. Throughout the life of the ARM the margin does not change.