7-Year ARM A Strategy for Affordable Homeownership

A 7-year ARM has both benefits and drawbacks for homeowners considering a home loan.

Some borrowers may consider adjustable-rate mortgages riskier than fixed-rate mortgages—because of the possibility of a higher payment later on.

But homeowners who sell or refinance before the rate change can pay a significantly lower interest rate than fixed mortgages. Some even save money even though they keep the mortgage long after it starts to adjust.

Depending on your goals, a 7-year ARM could help you cut homeownership costs.

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What is a 7-year ARM?

A 7-year ARM is an adjustable-rate mortgage with a seven-year fixed period. This means your interest rate remains unchanged during the fixed period, regardless of market fluctuations.

After the initial 7-year fixed-rate period, your interest rate could increase depending on the market at that time.

All 7-year ARMs are 30 year loans and do not come with a balloon payment. They will carry an adjustable rate for 23 years or until you pay off the loan.

How does a 7-year ARM work?

Because interest rates for ARMs are usually lower than fixed-rate mortgages, they can offer homeowners significant savings during the fixed period.

Homeowners can benefit from the lower initial interest rate—and lower monthly payments—for up to seven years and refinance or sell before paying potentially increased interest rates.

Those who stick with their 7-year ARM for more than seven years can experience a rate increase depending on market conditions. But rate caps can help protect homebuyers from too-big interest rate jumps.

7-year ARMs are available for various loan types, including FHA loans, VA loans, and conventional loans.

Related: 7/1 Interest-Only ARM Loan: Afford More Home

ARM rate caps mean protection for the borrower

Most adjustable-rate mortgages are accompanied by a rate cap, limiting how much your interest rate can increase or decrease.

There are three different ARM rate caps—initial, period, and lifetime rate caps.

• An initial interest rate cap limits how much interest rates can increase at the end of your initial, fixed-rate period.
• A periodic rate cap limits how much your mortgage interest rate can increase from one adjustment period to the next adjustment period.
• A lifetime interest rate cap limits how much your interest rate can increase over the entirety of your home loan term.

Let's look at an example of an ARM loan with a 5/2/5 rate cap structure.

• Your rate can rise up to 5% above the initial rate.
• The rate can adjust up to 2%each subsequent year.
• Your rate can never adjust more than 5% higher than your initial rate.

7-year ARM vs 5-year ARM

The shorter your initial fixed-rate period, the lower your interest rate.

ARMs offer homeowners a fixed interest rate for an initial period and then switch to an adjustable rate.

A 7-year ARM and a 5-year ARM work the same way. Both begin with fixed terms and convert to an adjustable-rate mortgage after the initial period.

With a 7-year ARM, the fixed rate period is for seven years; for a 5-year ARM, the fixed rate period is for five years.

If you plan on refinancing or selling your home in just a few years, , a 5-year ARM could suit you better than a 7-year because it comes with a lower initial rate.

Alternatively, a 7-year ARM could offer the additional time you want extra time before making a change to your financial situation or hoping to save money for a longer period.

7-year ARM vs. 30-year fixed

The main advantage of 7-year ARMs is that they offer homeowners lower monthly payments during the initial 7-year fixed rate period—typically lower than interest rates for 30-year fixed-rate mortgages.

Lower interest rates, which can translate into lower monthly mortgage payments, can help you save money—adding up to tens of thousands of dollars during the locked-in period.

While 30-year fixed terms can offer the same interest rate stability for the loan's lifetime, homeowners can expect to pay more during the first seven years compared to a 7-year ARM. Following is a savings example assuming a $350,000 loan.

*Rates and rate spread shown are for example purposes only. Your rates will be different. Payments do not include taxes, insurance, or HOA dues.

7-Year ARM rates

Interest rates for 7-year ARMs are lower than fixed-rate mortgages. Considering today's environment of high fixed mortgage rates and skyrocketing home prices, lower interest rates can put some much-needed money back into your pocket.

7-year ARM alternatives

Standard adjustable-rate mortgages

• 3-year ARM
• 5-year ARM
• 10-year ARM
• VA adjustable-rate mortgage
• FHA adjustable-rate mortgage

Interest-only adjustable-rate mortgages

• 3-year interest-only ARM
• 5-year interest-only ARM
• 10-year interest-only ARM

7/1 ARM vs 7/6 ARM

A 7/1 adjustable-rate mortgage has a locked-in interest rate for the first seven years and can have rate adjustments every one year after that. This is why it’s called a 7/1 ARM.

A 7/6 ARM has a fixed interest rate for the first seven years and then can adjust every six months after that, hence the 7/6 moniker.

Both 7/1 ARMs and 7/6 ARMs offer lower interest rates at the start than prevailing rates for most fixed-rate products, such as the 30-year fixed-rate mortgage.

FAQ

7-year ARMs: They could make you a homeowner sooner

A 7-year ARM can be an appealing option for homeowners who don't plan on staying in one place for an extended period.

According to NAR (National Association of Realtors), most Americans stay in their homes for just 13 years and as low as seven years in many areas of the country So the option of a lower interest rate for most or all of your time in the home or mortgage can be an attractive option for homeowners interested in saving money before moving.

For homeowners planning on staying in place, refinancing before the end of the fixed rate period can offer the best of both mortgage worlds: lower interest rates at the start and stable rates for the remainder of the mortgage loan.