Quick Introduction to 7/1 ARM Mortgages
A 7/1 adjustable-rate mortgage is a hybrid home loan product. Homebuyers make fixed monthly mortgage payments at a fixed interest rate for the first seven years. After 84 months have passed, 7/1 ARM mortgage rates can increase (or decrease) once a year and can fluctuate throughout the remainder of the loan term.
|7/1 ARM Average||4.17%||4.18%||-0.01|
|7/1 ARM Average||4.31%||4.27%||+0.04|
National Mortgage Rates
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7/1 Adjustable-Rate Mortgage Rates
A 7/1 adjustable-rate mortgage (ARM) can be beneficial to someone who’d like a low interest rate and cheaper initial mortgage payments. The initial interest rate (in this case, seven years) is generally lower than fixed rate mortgages. ARMs usually most appeal to homebuyers planning on selling the property within a few years of purchase.
Historical 7/1 ARM Rates
Adjustable-rate mortgage products have only been around since the 1980s. As of November 2018, 7/1 ARM mortgage rates were around 4.23%, on average, nationally. In July 2015, the average mortgage rate for 7/1 ARMs was around 3.29%. In late December 2008 when the U.S. and much of the world was in the midst of a financial crisis, the average mortgage rate for 7/1 ARMs was around 6.30%.
7/1 Adjustable-Rate Mortgage Rates
|Year||Average Annual Mortgage Rate|
Following the initial seven-year period of fixed interest rates, 7/1 ARM interest rates adjust and become fully indexed interest rates. Fully indexed rates for 7/1 ARMs depend on a margin (this stays the same during the entire loan term) and an index such as the 1-year London Interbank Offered Rates (LIBOR) Index. For example, if you have a margin of 2% and the index has an interest rate of 4.25%, the interest rate for your 7/1 ARM would be 6.25%. There are usually maximum rates specified in your mortgage contract so you know how high your interest rate could go during the life of your loan.
How 7/1 ARM Rates Stack Up Against Other Mortgage Rates
Homebuyers who take on 7/1 ARMs usually have mortgages with 30-year terms. But many of them pay off their mortgages (or refinance) before the initial seven-year period comes to an end.
Compared to the standard fixed-rate mortgages (like the 15-year fixed rate mortgage and the 30-year fixed rate mortgage), 7/1 ARMs traditionally have lower interest rates, at least within the first seven months of the loan term. That low initial interest rate can make the 7/1 ARM an affordable mortgage option for homebuyers. But it’s important to make sure the maximum interest rate outlined in your mortgage contract will also fit into your budget, in case it ever raised to that point after the initial seven-year fixed term.
Borrowers with 7/1 ARM mortgages also have an advantage over those with 5/1 ARMs or 3/1 ARMs. After all, their mortgage rates are fixed for a longer period of time. That’s why homebuyers tend to look at 7/1 ARM mortgage rates during periods when interest rates are high.
After 84 months pass, borrowers with 7/1 ARMs will likely find themselves with a higher interest rate. If your interest rate ends up impacting your mortgage payments to the point where it’s too expensive for your budget, you may have to consider refinancing. Another option is selling your home. The last thing you’d want to happen is defaulting on your home loan as that will severely impact your credit. Therefore, if you’re planning on using a 7/1 ARM, it’s essential to know your finances.
Let’s look at an example to see potential mortgage payments compared between a 7/1 ARM with a 30-year term and a 30-year fixed rate mortgage. For this example, let’s say you’re buying a $175,000 home with a standard 20% down payment of $35,000. Using a mortgage calculator and using an estimate of a 7/1 ARM starting at 3.8%, your principal and interest payment will be $652. A 30-year fixed rate mortgage at 4% would cost you $668 per month. The difference isn’t huge with this example because the current mortgage rates only differ by 0.2%, but it can be more dramatic depending on what interest rates are offered. However, unless you’re planning on selling the home within those first seven years, you’d most likely benefit more from a fixed-rate mortgage.
7/1 ARM Rate Caps
In many cases, 7/1 ARM mortgage rates have caps. There could be a cap that limits how high an interest rate can go within a specific period of time. There might also be a cap that limits how high an interest rate can go over a loan’s lifetime. Some interest rates can increase by 6% (or more) following the end of the initial seven-year period.
If your 7/1 ARM comes with a cap, it’s important to understand that your mortgage payment amount could change on a monthly basis. As a result of these interest rate shifts, it can be difficult to know how much money to set aside for mortgage payments following the 7-year period of fixed mortgage rates.
7/1 ARM Quotes
By looking at mortgage rate quotes, you can get a sense of what a mortgage might cost you before you begin the application process. The 7/1 ARM rates you’re offered will depend on the personal information that you enter, including your down payment, your credit score, your zip code and the home purchase price you’re most comfortable with.
Your 7/1 ARM rate will likely not only give you an estimate of what your monthly mortgage payment might be, but it’ll probably also show you what you’ll owe in terms of fees like loan origination fees. Many websites provide homebuyers with mortgage rates that they can view free of charge. The table above is one of those. Seeing how different rates compare to each other is a good idea if you want the best deal on your 7/1 adjustable-rate mortgage.
Factors to Consider When Comparing 7/1 ARM Rates
As you’re shopping around and taking a look at 7/1 ARM mortgage rates, there are several things that you’ll need to keep in mind. Since mortgage rates are tied to an index, they’ll increase as the interest rates in the index go up (after the conclusion of your initial 84-month period). If you’re not sure whether your salary will increase within the next seven years (or whether it’ll be high enough to cover the cost of a more expensive mortgage bill), you might need to look into mortgage products with permanently fixed interest rates.
It’s important to find out how often your mortgage rate will change and whether there are any prepayment penalties charged if borrowers pay off their mortgages early. You’ll also need to know whether there’s a rate cap.
If you want the lowest possible rate on your 7/1 ARM, it helps to have a good credit score, a stable source of income, cash savings and a low debt-to-income ratio (meaning that you’re not putting a large percentage of your income toward paying off debt). Lender requirements can vary, so you’ll need to check with a specific lender to find out whether there’s a minimum credit score you need to have. As a general rule, it’s best to keep your debt-to-income ratio below 36% if you’re going to be applying for a mortgage.
If all else fails, you could try convincing your lender to lower your mortgage rate by offering to make a larger down payment or paying for mortgage points. One point can reduce your mortgage rate by up to 0.25%.
Taxes and 7/1 ARMs
If you qualify for the mortgage interest deduction, it’s a great tax benefit. Of course, if you’re not paying a lot of interest because you’re already working with a relatively low mortgage rate for your 7/1 ARM, your deduction won’t be as high as it would be if you had a 30-year or 15-year fixed rate home loan.
Uncle Sam gives homeowners permission to deduct interest on mortgage loan amounts that are up to $1 million when they decide to itemize their deductions. If you have a home equity loan, you can deduct mortgage interest on up to $100,000 of debt.
As a homebuyer you’ll need to be prepared to pay for property taxes as well as a real estate title transfer tax, depending on where you live. And don’t forget that if you sell your house, you might end up with a bigger tax bill once you stop receiving that mortgage interest deduction.
Refinancing Your 7/1 ARM
If you’re getting a 7/1 Hybrid ARM with the intention of refinancing your loan at some point, it can be a good idea to refinance before the seven-year fixed-rate period is over. That way, you’ll be able to take advantage of having low interest rates before getting another mortgage loan.
Even if you’re not considering a refinance, it could be a good move if you don’t want to get stuck with a higher interest rate (and a bigger mortgage payment) starting with the 85th month of your loan term. But you’ll have to fill out paperwork, likely pay fees and submit to a credit check in order to qualify for a refinance.
If you have a 30-year fixed rate mortgage or a 15-year fixed rate mortgage, you could refinance and get a 7/1 ARM. That could work well if you plan on selling your house within the next seven years. Your interest rate will be lower and then you can use whatever money you’ve saved for other purposes, like paying off debt or padding your emergency fund.
Big Cities with the Healthiest Housing Markets
With SmartAsset’s interactive Healthy Housing Markets map, you can locate the healthiest housing markets among America's largest cities. Search for the overall healthiest markets or look specifically at one of our four healthy-housing indicators: stability, risk, ease of sale and affordability. Hover over a city or state to get more information.
|Rank||City||Average Years Living in Home||Avg. Homes with Negative Equity||Homes Decreasing in Value||Avg. Days on Market||Home Costs as % of Income|
Methodology A healthy housing market is both stable and affordable; homeowners in a healthy market should be able to easily sell their homes, with a low risk of losing money over the long run. So, in order to find the big cities with the healthiest housing markets in the country, we considered the following four factors: stability, affordability, fluidity and risk of loss. For the purpose of this study, we only considered cities with a population greater than 200,000.
We measured stability with two equally weighted indicators: the number of years people remain in their homes and the percentage of homeowners with negative equity (as homeowners with negative equity are more likely to go into foreclosure). To account for our second factor, risk, we used the percentage of homes that decreased in value. To determine housing market fluidity, we looked at data on the average time a for-sale home in each area spends on the market - the longer it takes to sell, the less fluid the market. Finally, we calculated affordability as the monthly cost of owning a home as a percentage of household income in each county and city.
Affordability accounted for 40% of the housing health index, while each of the other three factors accounted for 20%. When data on the above four factors was unavailable for cities, we excluded these from our final rankings of healthiest markets.
Sources: US Census Bureau 2016 American Community Survey, Zillow