What is a 7/6 ARM?
An adjustable-rate mortgage (ARM) has a fixed rate for a set amount of time, after which it fluctuates
Buying a house is a big financial endeavor, so understanding how each type of loan works, along with how your mortgage payments for both the short and long term will work, is essential for knowing which type of mortgage will be best for you. An adjustable-rate mortgage (ARM) has a fixed rate for a set amount of time, after which the rate fluctuates.
A 7/6 ARM has a fixed interest rate for seven years, after which the interest rate changes every six months. For the initial seven-year period, your monthly mortgage payment will remain the same.
Key insights
- A 7/6 ARM has a fixed interest rate for seven years, after which the loan rate changes every six months.
- A 7/6 ARM may be a good option for someone expecting to have a pay increase or planning to move to a different home before the set fixed rate ends.
- A 7/6 ARM can help people save money by having a lower fixed interest rate for seven years.
What is a 7/6 adjustable-rate mortgage (ARM)?
A 7/6 ARM is a home loan with a seven-year fixed interest rate. Monthly mortgage payments will be the same for the first seven years, allowing you to plan your home expenses without any surprises or changes. When the initial seven-year period ends, the interest rate will then change every six months, affecting your monthly mortgage payment and what you owe. A mortgage payment could increase or decrease based on the current market rates.
Rates
The interest rate is set for the first seven years. After the set period, interest rates can fluctuate based on the current market and will be determined by your lender or bank. Monthly mortgage payments could increase substantially during the duration of the loan. Many factors affect 7/6 ARM rates, including the margin, caps, intervals, interest rate floors and the index.
Adjustment interval
The adjustment interval is how often the interest rate will change. In a 7/6 ARM, the adjustment period is every six months after the fixed-rate period ends.
Rate caps
Following the first seven years, the loan's interest rate will change every six months and you can anticipate a higher interest rate than the initial set rate. However, caps are placed on how high an interest rate can be, allowing the mortgage holder to prepare and plan for the highest interest rate they could face during the duration of the loan and the changing market rates.
» MORE: What is an adjustable-rate mortgage and how do they work?
Who is a 7/6 ARM best for?
Someone who wants to take advantage of a lower interest rate for a set amount of time may opt for a 7/6 mortgage. Planning for and understanding that monthly mortgage payments can increase and you will need to be able to afford a potentially higher monthly payment is important.
Homebuyers who plan to refinance or sell may be a good candidate for this type of mortgage. "A seven-year ARM is a great product for anyone looking to take a mortgage today as the rate is lower than a 30-year fixed rate,” said Melissa Cohn, regional vice president at William Raveis Mortgage, which can “save a borrower money in the next year or two as they wait for rates to drop and get the opportunity to refinance into a fixed rate or longer-term adjustable at much lower rates."
» MORE: ARM vs. fixed rate mortgage
Pros and cons of a 7/6 ARM
An ARM loan may be a good idea if you expect changes in your life, such as an increase in salary or moving to a different home before the interest rate fluctuates. However, it is important to realize that ARM loans have a lot of complicated rules and fees. A borrower who doesn't understand their specific ARM loan could incur unexpected financial risks.
Weighing the pros and cons of a 7/6 ARM is important before deciding on a mortgage type.
Pros
- Fixed monthly payments for seven years
- Lower interest rates
- Interest rate caps
Cons
- Unpredictable rate fluctuations after fixed term
- Penalties for refinancing too early
- Complicated rules and fees
FAQ
Can I refinance my 7/6 ARM into a fixed-rate mortgage?
Yes, a 7/6 ARM loan can be changed to a fixed-rate mortgage. Typically, this is done when interest rates are low.
What should I consider before choosing a 7/6 ARM?
Before choosing a 7/6 ARM, it's important to consider your goals and needs. A 7/6 ARM can be a good idea for someone who wants a lower monthly mortgage payment for several years without any fluctuations. Homeowners who don't anticipate staying in the same home long-term can benefit from lower monthly payments.
How does a 7/6 ARM compare to other types of ARMs?
An ARM loan means there is a fixed interest rate for a set amount of time before it changes. A 7/6 ARM means the fixed-rate loan is set for seven years and then the rate changes every six months thereafter. A 3/6 loan means the fixed rate is for three years and then fluctuates every six months thereafter.
Bottom line
Before you sign on the dotted line, it's important to understand your risk aversion, your finances and current and future income, as well as your plans for the home. A 7/6 ARM may not be the best option if it's a home you plan to live in long-term. If you plan to sell or refinance the property, a 7/6 ARM may be a good option.
Article sources
- Consumer Finance Protection Bureau, “Consumer Handbook on Adjustable-Rate Mortgages.” Accessed Feb. 28, 2024.
