DECEMBER 11TH, 2018

7-Year Adjustable-Rate Mortgages (ARMs)

The interest rate as well as monthly payment of most Adjustable-Rate Mortgages change every year, every three years, and so forth. The period between one rate change and the next change is called the “adjustment period”. Therefore, a loan with an adjustment period of Seven (7) Years is called a 7-Year ARM (aka 7/1 ARM), and the rate can change or adjust every year AFTER the initial 7 years for the remaining life of the loan and accordingly to whichever index the consumer and lender agree upon.

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A 7/1 ARM is perfect for the consumer who desires to have the predictability of low monthly payments for the first seven years of their mortgage. This option may also be good for consumers if they plan on refinancing or selling their home after seven years. Another benefit is that if the consumer needs a some time to pay off debts, etc. before having to make larger payments on their mortgage. As with any Adjustable-Rate Mortgage plan, the initial interest rate will be lower than a fixed-rate mortgage plan. Consumers should keep in mind though that after that first seven years of lower payments, their payments can change, sometimes significantly. It is of utmost importance that consumers are able to pay their monthly payments accordingly to avoid potential foreclosure. Then, there is also the possibility to either sell, move, or refinance for a different adjustable-rate mortgage or even a fixed-rate mortgage AFTER the first seven years of the 7/1 ARM.

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About 7-Year Adjustable Rate Mortgages

Consumers may have some questions not covered so far and some of those will be addressed in this section. For instance:

Are There Any Special Kind of Down Payment Requirements for a 7/1 ARM?
Typically, most lenders require a down payment of 5%-10% for this type of loan.

If Interest Rates Skyrocket After the Initial 7-Year Rate Period is Over, What Recourse Would a Consumer Have? The 7/1 ARM will be capped and most have an annual cap of two points; and a lifetime cap of six points.

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What Type of Indexes Can Be Used for a 7/1 ARM?

Consumers can index their 7/1 ARM by COFI, COSI, LIBOR, or 12 MTA.

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