What Is a 7/1 Adjustable-Rate Mortgage (ARM)?
Quick Answer
A 7/1 ARM is a type of adjustable-rate mortgage. During the first seven years, you’ll likely have a low, fixed rate. After that, your mortgage rate will be recalculated and adjusted annually, so your monthly payment can fluctuate.
When it comes to home loans, homebuyers have options. With a 7/1 adjustable-rate mortgage (ARM), you'll have a fixed interest rate for the first seven years. Your rate will then change once a year going forward. That means your monthly payment can fluctuate. Whether it's right for you will depend on your financial situation and how long you plan on staying in the home.
What Is a 7/1 ARM?
A 7/1 adjustable-rate mortgage is a type of adjustable-rate mortgage. All mortgages fall into two main categories:
- Fixed-rate mortgages: You'll have the same interest rate for the life of the loan.
- Adjustable-rate mortgages: You'll likely start with a low, fixed interest rate that lasts for several years. After that, you can expect rate adjustments at regular intervals.
If you opt for a 7/1 ARM, your mortgage rate will be fixed for the first seven years. Annual rate adjustments will then follow. There are several types of ARMs, and you'll find a different combination of numbers attached to each one. The first number tells you the length of that initial fixed-interest period. The second represents how often the rate will be adjusted after that.
Learn more: Common Types of Adjustable-Rate Mortgages
How Is a 7/1 ARM Different From a Fixed-Rate Mortgage?
The main difference between a fixed-rate mortgage and an ARM is that your interest rate and monthly payment will never change with a fixed-rate loan. That can make it easier to budget—and you could avoid rate hikes down the line. But if mortgage rates go down, you'll miss out if you're locked into a higher fixed rate.
How Does a 7/1 ARM Work?
A 7/1 ARM has a fixed interest rate for seven years, then it adjusts once a year. Let's say the average interest rate for a 30-year fixed mortgage is 6.70%, but a 7/1 ARM is offering an introductory fixed rate of 6.19%. While it's impossible to predict what mortgage rates will be like seven years from now, that initial lower rate is guaranteed. When that time ends, your mortgage lender will recalculate your rate every year.
They'll start by looking at the benchmark rate that's tied to whatever index the lender is using. That may be the U.S. prime rate or something called the Constant Maturity Treasury (CMT) rate. Your lender will then tack on additional percentage points based on their own ARM margin, which can vary from one lender to the next.
Economic trends will likely play a big role here. If your adjustment period rolls around and mortgage rates are on a downward trend, you may be in for a rate cut—but the opposite is also true. As a result, your monthly payment could bounce up and down year after year.
How Much Can a 7/1 ARM Rate Increase?
The good news is that there are rate caps on how much your 7/1 ARM rate can go up. Here are a few key terms to know:
| Adjustable-Rate Mortgage Rate Caps | |
|---|---|
| Initial cap | The maximum amount your rate can change during the first adjustment period (usually 2% or 5%) |
| Periodic cap | The maximum amount your rate can change during subsequent adjustments (usually 1% or 2%) |
| Lifetime cap | The maximum amount your rate can increase from start to finish (usually 5%) |
Source: Consumer Financial Protection Bureau
What Are the Requirements for a 7/1 ARM?
The eligibility guidelines for 7/1 ARMs are similar to fixed-rate mortgages. The specifics will depend on your lender's requirements, but they'll likely consider the following factors:
- The type of mortgage you're getting: The down payment and credit score requirements for a government-backed mortgage, like a Federal Housing Administration (FHA) loan, are different from a conventional mortgage.
- Your credit score: You'll likely need a minimum credit score of 620 to qualify for a conventional 7/1 ARM, but it's possible to get an FHA loan with a score as low as 500.
- Your debt-to-income ratio (DTI): This represents how much of your gross monthly income is going toward debt payments. Most lenders prefer a DTI that's less than 43%.
- Your down payment: It's possible to qualify for a conventional loan with a 3% down payment, and FHA loans require just 3.5%. Other government-backed mortgages have no down payment requirements.
How to Compare 7/1 ARMs
The rates and terms of a 7/1 ARM can vary depending on the lender. If you're considering one, be sure to compare the following details:
- The introductory rate: This is typically lower than fixed-rate mortgages. The lower your rate, the less interest you'll pay during the initial repayment period.
- Adjustment rate caps: How much could your rate change over time? Shop around and compare the initial cap, periodic cap and lifetime cap of 7/1 ARMs from different lenders.
- Adjustment intervals: With a 7/1 ARM, your rate will be recalculated on an annual basis, but you may want to consider rates and terms for ARMs that adjust every six months.
Pros and Cons of a 7/1 ARM
Taking out a mortgage is a big financial decision—and the type you choose will impact how much interest you pay over the long haul. Carefully consider the pros and cons of 7/1 ARMs before signing.
Pros
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Low initial interest rate: You'll have a lower initial interest rate, which could be good news for your budget.
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The interest rate can drop in the future: Your rate could drop even further during an adjustment period, depending on economic conditions and rate trends.
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No rate changes if you sell before the fixed period ends: You won't have to worry about rate adjustments if you sell your home or refinance before the introductory period ends.
Cons
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Interest rates can increase after the fixed period: If interest rates go up, your rate and monthly payment could increase as well.
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Annual interest rate increases are possible: Adjustments on a 7/1 ARM happen every year, which can be stressful—especially if you don't have room in your budget to accommodate them or a strong emergency fund.
Should You Get a 7/1 ARM?
Whether a 7/1 ARM is right for you will come down to your personal preferences and financial situation. Your housing plans are also important to consider. If you see yourself living in the home for just a few years, a 7/1 ARM could help you lock in a low introductory rate before selling and moving on. It might also be a good fit if you're expecting to have more income when your adjustment periods begin.
But long-term homeowners may want to tread carefully. The inherent unpredictability of 7/1 ARMs can be stress-inducing, and it's possible for your rate to increase up to the lifetime cap. Refinancing may help you secure a lower rate, but doing so comes at a cost.
Alternatives to a 7/1 ARM
A 7/1 ARM isn't your only mortgage choice. Here are some additional home loan options to consider:
- A fixed-rate mortgage: A 15-year or 30-year mortgage can provide predictability and a steady monthly payment. And you could always refinance if interest rates significantly drop in the future. The long-term savings may be worth the initial costs of refinancing.
- Another type of ARM: Adjustable-rate mortgages come in all shapes and sizes. Some offer initial fixed-rate periods that last for five, seven or 10 years. Adjustments typically happen every six or 12 months. A different structure might be your best option.
Frequently Asked Questions
The Bottom Line
If you're trying to decide if a 7/1 ARM is a good idea, start by thinking about your finances. Are you comfortable with your monthly payment potentially increasing? And how long do you plan on staying in the home? Your answers could help guide you toward the best mortgage structure. Either way, be sure to shop around and compare rates and terms with multiple mortgage lenders.
No matter what type of home loan you choose, your credit score will likely be a key factor—having healthy credit can help you qualify for the best mortgage rate. You can get your FICO® Score☉ and credit report for free from Experian to see where you stand.
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About the author
Marianne Hayes
Marianne Hayes is a longtime freelance writer who's been covering personal finance for nearly a decade. She specializes in everything from debt management and budgeting to investing and saving. Marianne has written for CNBC, Redbook, Cosmopolitan, Good Housekeeping and more.
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