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When securing a loan to purchase a home, borrowers have the choice of a fixed-rate mortgage or an adjustable-rate mortgage (ARM). A fixed-rate mortgage locks in predictable payments and set rates, while payments can change with an adjustable-rate mortgage.
A 7/1 ARM is a specific type of adjustable-rate mortgage in which rates are locked in for the first seven years and then are adjusted once a year after that (that's what the 7/1 stands for). Borrowers who choose a 7/1 ARM get the benefits associated with an adjustable-rate mortgage, but a little bit more predictability than, for example, a 5/1 ARM. Here's an overview of what today's 7/1 ARM interest rates look like.
|Product||Interest Rate||Average Points/Credits|
|Fixed 30 Year||2.935%||0.162|
|Fixed 20 Year||2.874%||0.071|
|Fixed 15 Year||2.408%||0.019|
|Fixed 30 Year - FHA||2.993%||0.330|
|Fixed 30 Year - VA||2.828%||0.318|
|Fixed 30 Year - Jumbo||3.231%||0.093|
|Fixed 30 Year||3.002%||0.163|
|Fixed 20 Year||2.956%||0.114|
|Fixed 15 Year||2.527%||0.071|
|Fixed 30 Year - FHA||2.891%||0.276|
|Fixed 30 Year - VA||2.687%||0.040|
|Fixed 30 Year - Jumbo||3.155%||0.002|
When you take out an adjustable-rate home loan, such as a 7/1 ARM, the initial starting rate is guaranteed for an initial period of time -- in this case, for seven years.
The rate is tied to a financial index, such as the LIBOR index or the prime rate or the federal fund's rate. After the initial seven-year period, your loan interest rate could adjust once per year with a 7/1 ARM. The adjustment depends on whether rates have risen or fallen on the index that the loan is tied to.
ARMs are structured so you repay your mortgage loan over a fixed period of time -- usually over 30 years. Your monthly payment amount is based on the amount you'd need to repay your principal and interest in full during your loan term.
That means if interest rates go up, your payment will also rise because you'll need to cover more interest costs to pay off your loan. If interest rates go down, your payment could fall because less of your money will go towards interest costs.
This is in contrast to a fixed-rate mortgage where your rate and payment stay the same for the entire loan repayment period. Fixed-rate mortgages present more risk for lenders because the rate you pay doesn't go up even if rates rise substantially. For that reason, most mortgage lenders typically charge lower starting rates for ARMs than they do for fixed-rate loans. The low introductory rate can make a 7/1 ARM attractive to buyers who want the lowest initial monthly payments.
Unfortunately, borrowers take on risk with an ARM because they could see their loan become more expensive if rates rise. However, a 7/1 ARM does present less risk than a 5/1 ARM, which locks in your starting rate for a shorter period of time. Still, borrowers should make sure they can repay their loan even if payments go up after the rate adjusts. Check your mortgage paperwork to find out just how high your payments could go, as there’s generally a maximum rate.
When comparing 7/1 ARM mortgage rates, you should obtain quotes from at least three different lenders, including banks, personal loan lenders, and online lenders. Look for those that allow you to get pre-qualified without impacting your credit score.
Pay attention to the starting interest rate, how high your payments could rise, loan origination fees, prepayment penalties, and other costs associated with the loan. Comparing the annual percentage rate (APR), which takes fees into account, can give you a better idea of total loan costs than looking at interest alone.
You should also make certain you're comparing 7/1 ARM loan offers only with other adjustable-rate mortgages in which your initial starting rate is locked in for seven years. If you compare a 7/1 ARM to a fixed-rate mortgage or a 5/1 ARM, you aren't comparing apples to apples. With a fixed-rate mortgage, you can often expect to pay a little more in interest up front in exchange for predictability. 5/1 ARM rates may be a little lower to start with but you'll have to worry about your payment adjusting two years sooner.
For many borrowers, a 7/1 ARM is a good balance between risk and low rates. Since you have seven years to pay your mortgage at your starting rate, you should be able to pay down your mortgage quite a bit over the initial period when your rate is locked in. This can make it easier to refinance if rates have adjusted upward at the end of the seven years. A 7/1 ARM also makes sense if you want to keep payments as low as possible and you plan to move before your rate changes.
Still, if you would prefer to have the certainty of knowing your rate and monthly mortgage payment will stay the same over the life of the loan, a fixed-rate mortgage is a better option. With mortgage rates at or near record lows, it generally makes sense to secure a fixed-rate loan right now if you can. There's a strong chance rates will be higher in seven years than they are now.
A 7/1 ARM is an adjustable-rate mortgage in which your initial starting interest rate is fixed for seven years. The rate can then adjust up or down, moving with a financial index, and your total monthly payments could rise or fall along with it.
To find the best 7/1 ARM rates, secure mortgage quotes from several different lenders. Compare rates and terms to find out which offers the lowest total borrowing costs. It can also be helpful to improve your credit score and pay down debt to qualify for a loan at the most competitive rate.
A 7/1 ARM can be a good option if you are interested in an adjustable-rate mortgage. ARMs often have lower starting interest rates than their fixed-rate counterparts.
A 7/1 ARM provides a good balance between the desire for low rates and the potential risk of an adjustable-rate loan. Your starting rate will be locked in for longer than, say, a 5/1 ARM that guarantees your initial rate for only five years. However, it is still a riskier option than a fixed-rate loan and may not be the best choice given today's record-low mortgage rates.
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