A 7/1 ARM (Adjustable Rate Mortgage) is a type of hybrid ARM where the interest rate remains fixed for the first 7 years and then adjusts annually based on an index plus a margin. Here are the details on how a 7/1 ARM works:
- Initial Fixed Rate Period: For the first 7 years, the interest rate is fixed and does not change. This provides borrowers with stability and predictability in their monthly payments during this period
- Adjustment Period: After the initial 7-year fixed period, the interest rate adjusts annually. The new rate is determined by adding a margin to the current index
rate.
- Interest Rate Caps: There are limits on how much the interest rate can change.
For example:
- A 7/1 ARM Plan 3551 has a 2/2/6 cap, meaning the rate can increase by a maximum of 2% at the first adjustment, %2 at each subsequent adjustment, and a total of %6 over the life of the loan
- FHA guidelines specify that a 7-year ARM may only increase by two percentage points annually after the initial fixed interest rate period, and six percentage points over the life of the mortgage
In summary, a 7/1 ARM offers a fixed interest rate for the first 7 years, followed by annual adjustments based on an index plus a margin, with specific caps on how much the rate can change at each adjustment and over the life of the loan.
