What Is A 7/1 Adjustable-Rate Mortgage? Bankrate
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Michael H/Getty Images Advertiser Disclosure
We are an independent, advertising-supported comparison service. Our goal is to help you make smarter financial decisions by providing you with interactive tools and financial calculators, publishing original and objective content, by enabling you to conduct research and compare information for free - so that you can make financial decisions with confidence.
Bankrate has partnerships with issuers including, but not limited to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Make Money
The offers that appear on this site are from companies that compensate us. This compensation may impact how and where products appear on this site, including, for example, the order in which they may appear within the listing categories. But this compensation does not influence the information we publish, or the reviews that you see on this site. We do not include the universe of companies or financial offers that may be available to you. Michael H/Getty Images Written by This article was generated using automation technology and thoroughly edited and fact-checked by an editor on our editorial staff. May 18, 2022 Edited by Mortgage editor Suzanne De Vita is the mortgage editor for Bankrate, focusing on mortgage and real estate topics for homebuyers, homeowners, investors and renters. May 18, 2022 Share
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PREV NEXT What is a 7 1 ARM
A 7/1 ARM is a that has a fixed interest rate in the beginning, then switches to an adjustable or variable one. The 7 in 7/1 indicates the initial fixed period of seven years. After that, the interest rate adjusts once yearly based on the index stated in the loan agreement, plus a margin set by the lender. The 7/6 ARM is another common mortgage, which adjusts every six months after the initial period. When does a 7 1 ARM adjust
If you were to close your loan on July 1, 2022, the first rate adjustment will happen on July 1, 2029 - that is, seven years later. At this time, the payments of your loan are recalculated going forward based on the then-prevailing interest rate. It's anybody's guess whether the new rate will be higher or lower than the initial rate. Then, a year later on that same date, the loan's rate will reset again, and so on each year throughout the term of the loan. What index does the 7 1 ARM use
An index is a published value that is frequently updated to reflect the current rate. For years, these ARM loans have been tied to the yield on 1-year Treasury bills, the 11th District cost of funds index (COFI) or the London Interbank Offered Rate (LIBOR). As of this year, LIBOR has been discontinued and replaced by a new index called the . The rate you pay at the reset will be the rate of the index, plus a stated margin, which reflects the lender's profit on the loan. In May 2022, SOFR was 1.05 percent. If the margin is 3 percentage points, the loan rate would be the sum of the two, or 4.05 percent. Your margin may be more or less than that. 7 1 ARM vs 5 1 ARM
The 5/1 ARM has the same features of the 7/1, but the initial rate adjusts after the first five years. Generally, the interest rate on the 7/1 will be a little higher than the 5/1, reflecting the added time the initial rate is locked in. 7 1 ARM vs 3 1 ARM
Here again, the 7/1 ARM mirrors the 3/1 ARM, with the initial rate resetting after the first three years. The initial interest rate will be lower than the 7/1 because there's less risk for the lender. ARMs generally come with a cap on how much the interest rate can rise over the loan period and at each reset. What are the pros and cons of a 7 1 ARM
Pros
Cheaper at first: The main benefit of a 5/1 ARM is lower monthly payments compared with a . Interest rates for ARMs in recent months have dipped a full percentage point below comparable 30-year fixed loans. More house for your family: The lower payment allows you to take on a bigger mortgage and get a larger or better-located house. The payments might get even cheaper: If interest rates are falling, then your monthly payment will also decline after the initial period and potentially during future resets. Cons
Rising rates could cost you more: The big minus of the 5/1 ARM is exposure to higher rates after the fixed period is up. If rates have risen, your payment will increase. Complexity: There's more moving parts to an adjustable mortgage than a fixed one. Rate caps, indexes, resets - this can be pretty technical stuff for the average homeowner. Interest-only trap: Some ARMs allow you to only make interest payments and not principal in the initial period. That can allow you to stretch your budget and lower your payment, but after the fixed period your payments will be much higher to include the principal. If home values drop, you could find yourself on the loan. Bottom line
Since the average home is sold every 13 years, a 7/1 mortgage might make sense for a lot of homeowners who have no plans to stay in the home much beyond the fixed period of the loan. They will get a lower initial interest rate, although if they decide not to sell or refinance, the loan payments could become much larger after the initial fixed period. There's no way to predict what interest rates will be seven years from now, so it's a gamble. ON THIS PAGE
Written by Bankrate This article was generated using automation technology and thoroughly edited and fact-checked by an editor on our editorial staff. Edited by Mortgage editor You may also like