What is a 7/1 ARM?*

A 7/1 ARM is an Adjustable-Rate Mortgage (ARM) that has a fixed rate for the first seven years of the loan, and then adjusts each year thereafter. You may also see ARMs with different adjustment periods such as 10/1 (fixed rate for 10 years, adjusting every one year after), 5/6 (fixed rate for 5 years, adjusting every 6 months after) and 3/1 (fixed rate for 3 years, adjusting every one year after). The initial fixed rate period for an ARM usually has a lower interest rate compared to traditional fixed rate mortgages, making it a great option for some potential homebuyers.

How does a 7/1 ARM work?

You apply for an ARM the same way you would for other mortgages. When you close on your home loan, your interest rate is locked in for the entirety of the introductory period. Once the fixed-rate period ends, the interest rate can fluctuate, either up or down, depending on market conditions. This flexibility doesn’t make sense for all potential homebuyers – falling rates can lead to lower payments, but rising rates do just the opposite. And, the rate will continue to change until you refinance or pay off the loan in its entirety. It's important to think about all aspects of an ARM to see if it may be right for your situation.

When is an ARM a good fit?

An ARM may be a good fit for a potential homebuyer looking for smaller monthly payments up front and for those planning to stay in their homes 5-7 years or less. ARMs might work well for those planning to refinance their mortgage down the road and for buyers with a strong, consistently reliable cash flow. ARMs may also be a good option for first-time homebuyers who don’t plan to be in their home longer than the fixed-rate period.

ARMs may not be suitable for people planning to stay in their home long-term or who are not prepared for potential rate increases when the fixed-rate period ends.

Pros of a 7/1 ARM:

  • Interest rates can be a full percentage point lower than a 30-year fixed mortgage
  • This could mean a lower monthly payment and more home for your dollars
  • A lower payment can free up income for other expenses or to put into savings
  • Your rate is fixed for the introductory period, giving you time to refinance or sell before the rate changes
  • Your monthly payments might be lower if interest rates fall after your fixed-rate period

Cons of a 7/1 ARM:

  • Rates have the potential to rise after your fixed-rate period
  • This could increase your monthly payment and cost you more in the long run

Key terms of an ARM

  • Fixed-rate period: the period for which you pay your starting rate, typically 3, 5 or 7 years. This is typically the first number in the name of an ARM.
  • Adjustment interval: the frequency with which the rate will change after the fixed-rate period. Most commonly the rate adjusts every 6 months or annually. This is the second number in the name of an arm: “1” for one year or “6” for six months
  • Initial cap: the limit on how much the rate can adjust immediately after the fixed rate period ends
  • Periodic rate cap: the limit on how much the rate can change each time it adjusts
  • Lifetime cap: limits how much the interest rate can rise over the loan term
  • Payment cap: limits the dollar amount the monthly payment can rise over the life of the loan
  • Minimum rate: lowest rate your loan can adjust to
  • Maximum rate: highest rate your loan can adjust to

Final considerations

With these facts in mind, it’s important to be confident in the mortgage you choose. Be sure to consider the short- and long-term implications of an ARM, and talk to your real estate agent and loan officer to make sure the decision is the right one for you.

Solarity is here to help make these decisions easier for you! Use your handy home loan calculator to get started on figuring out what you can afford. If you’re in the market for a mortgage, our Home Loan Guides are here to make the entire process fast, easy and affordable!

*All loans subject to approval. With Solarity’s 7/1 adjustable-rate mortgage, the interest rate and payment are subject to increase once a year after the initial fixed-rate period of 7 years. Sample payment of $1,789 is based on a loan amount of $300,000, 75% loan-to-value (LTV) and 740 FICO score at 5.95% / 7.10% APR. It does not include taxes and insurance, which means your actual payment may be higher. Annual Percentage Rate (APR) accurate as of 5.8.24 and subject to change.

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