A home is a major purchase. Homebuyers know that even a small rate change can add to big savings.
If you’re a first-time homebuyer or have purchased in the past and are looking for an opportunity to lower your mortgage payments, you should consider the 7/1 ARM.
The 7/1 ARM could be the mortgage solution you need
MIDFLORIDA Credit Union now offers this great mortgage option to our clients. But what exactly is a 7/1 ARM, and how does it work?
In this article, we'll explore the basics of a 7/1 ARM, its advantages and disadvantages, and help you determine if it’s the right mortgage option for your needs.
Start your application with MIDFLORIDA Credit Union.
What is a 7/1 ARM?
The 7/1 ARM, is an Adjustable Rate Mortgage, offers offering a fixed interest rate for the first seven years, followed by annual adjustments based on market conditions.
After this initial period, the interest rate adjusts annually based on market conditions.
- The "7" refers to the number of years the interest rate remains fixed.
- The "1" indicates that the rate adjusts once per year after the fixed period ends.
Borrowers benefit from predictable payments during the fixed-rate period, much like a traditional fixed-rate mortgage.
Once the seven-year fixed period ends, the interest rate adjusts according to market trends, potentially increasing or decreasing your monthly mortgage payments.
How does a 7/1 ARM work?
A 7/1 ARM is designed to offer borrowers a lower initial interest rate compared to a 30-year fixed-rate mortgage. This can lead to significant savings during the first seven years of the loan.
Once the fixed period concludes, the interest rate changes annually, influenced by an index such as SOFR , plus a margin established by the lender.
Example of a 7/1 ARM
A 7/1 ARM might have a fixed interest rate of 3.5% for the first seven years.
Once the seven years are up, the rate might adjust to 4.5% or higher, depending on market conditions.
Most 7/1 ARMs include rate caps, which limit how much the interest rate can increase or decrease annually and over the life of the loan.
These caps protect against sharp increases, but monthly payments may rise after the fixed period.
Pros and cons of a MIDFLORIDA 7/1 ARM
As with any mortgage option, a 7/1 ARM has advantages and disadvantages. Understanding these will help you determine if they align with your financial objectives.
Pros of a 7/1 ARM
- Reduced payments initially: A 7/1 ARM generally offers a lower interest rate than a 30-year fixed-rate mortgage, leading to reduced monthly payments and significant savings during the first seven years.
- Benefit early: If you plan to sell your home or refinance within seven years, a 7/1 ARM can be an excellent choice. It allows you to take advantage of the lower interest rate without worrying about future rate changes.
- Flexibility: For those expecting income growth over time, the reduced initial payments can give you more financial flexibility to focus on other goals, such as paying off debt or investing.
- Opportunity for savings: Adjustable rates can rise and fall. Your monthly payments could become more affordable if market rates decrease after the fixed period.
- Refinance: If you seek more predictability, you can refinance at any time into a fixed-rate mortgage.
Cons of a 7/1 ARM
- Potential for increase: Once the adjustable period starts, your interest rate may increase, leading to higher monthly payments. This uncertainty can be a significant drawback if market rates rise.
- Loan could cost more: While the short-term savings are appealing, a 7/1 ARM could become more expensive if rates increase significantly during the adjustable period.
- Backup plan needed: If you can’t sell your home or refinance before the adjustable period begins, you could face rising payments that may strain your budget. Planning is crucial with this type of loan.
Is a 7/1 ARM right for you? When it might be a good fit
Deciding whether a 7/1 ARM is the best mortgage option depends on your financial goals, how long you plan to stay in the home, and your comfort level with potential risks.
A 7/1 ARM can be a smart option for borrowers looking to maximize short-term savings and take advantage of lower initial rates.
You plan to move or refinance within seven years
If you’re confident about selling or refinancing before the adjustable period begins, a 7/1 ARM can save you money through lower payments in the early years.
You want short-term savings
If your priority is to lower your mortgage costs soon, a 7/1 ARM allows you to securely lock in a lower interest rate for the first seven years, freeing up more of your budget for other expenses.
You can tolerate some risk
If you’re comfortable with the possibility of rising rates after the fixed period, and you can afford potential increases in your monthly payments, a 7/1 ARM might suit your needs.
When a 7/1 ARM might not be the best choice
For those planning to stay in their home long-term, the uncertainty of rate adjustments may outweigh the initial benefits of lower payments.
You plan to stay in your home long-term
If you intend to live in your home for more than seven years, the risk of rising rates could outweigh the short-term benefits of a 7/1 ARM. A fixed-rate mortgage may offer more stability in this case.
You prefer predictable payments
If you value stability and consistency in your mortgage payments, the potential for fluctuating rates with a 7/1 ARM could be stressful. A fixed-rate mortgage may provide greater peace of mind.
Your long-term plans are uncertain
If you’re unsure about your future—whether due to work, family, or lifestyle changes — committing to a mortgage with an adjustable rate may not be wise. Opting for a loan with predictable payments could be a safer option.
Explore whether a 7/1 ARM is right for you with MIDFLORIDA
At MIDFLORIDA, we know our clients are always looking for the best deal—that edge on the rates that might potentially save them thousands.
The 7/1 ARM has the potential for flexibility and savings that could fit your needs, making it an attractive option for buyers planning to move or refinance within seven years.
However, it's important to weigh the risks, including possible rate increases after the fixed period. Before choosing a 7/1 ARM, consider your long-term financial goals and risk tolerance.
To explore whether a 7/1 ARM fits your home buying or refinancing needs—start your application with MIDFLORIDA.
