Point of Interest
A 7/1 ARM can help short-term homeowners and buyers save on interest during the initial rate period, provided they are willing to risk interest rates going up (or down).
A 7/1 ARM is a type of adjustable-rate mortgage your lender might offer you when you’re buying a home. With a 7/1 ARM, you pay a fixed rate that’s typically lower than average 30-year fixed rates for the first seven years of the loan. Once the fixed-rate period is over, your interest rate will fluctuate once a year for the 23 years left on the loan.
According to Realtor Magazine, homeowners who sold their homes in 2019 had owned them an average of 8.05 years, which was slightly less than the 8.17 years in 2018. A 7/1 ARM can be a money-saving product for homeowners like these who want lower rates for the first seven years of homeownership. The best 7/1 ARM rates come with a reasonable rate cap, which is the maximum amount your interest rate can rise after the first seven years of the loan.
Tip: Compare 7/1 ARM down payment requirements, credit score requirements and interest rates to find the best lender for your unique financial situation.
The 4 best 7/1 ARM loan lenders of 2019
- Bank of America — Best for in-person lending
- New American Funding — Best for low fees
- Quicken Loans — Best for first-time homebuyers
- Wells Fargo — Best for Jumbo ARM loans
|Minimum deposit||Minimum credit score||Current 7/1 ARM rate|
|Bank of America||20% of the purchase price||740||2.875%|
|New American Funding||N/A||N/A||N/A|
|Quicken Loans||5% of the purchase price||620||2.5%|
|Wells Fargo||25% of the purchase price||740||2.625%|
What are 7/1 ARMs?
A 7/1 ARM is an adjustable-rate mortgage that has a fixed interest rate that’s typically lower than what you’ll get with fixed-rate loans for the first seven years of the term. After the first seven years, the interest rate adjusts to reflect the market for the remainder of the mortgage term.
There’s typically an interest rate cap with a 7/1 ARM, which prevents the new rate from going over a certain amount. So, even if rates skyrocket by the time the fixed-rate term of your ARM is over, you’ll still have some level of rate protection built in.
Tip: Make sure that you’re comfortable paying the maximum interest rate if rates do go up. Otherwise, a fixed-rate mortgage may be a better option.
Why should I get a 7/1 ARM?
A 7/1 ARM can be a good product for a homeowner who knows they’re likely to move out of their home within seven years. This type of loan allows them to lock in low rates while they’re living in the home. Once the seven years are over, they can accept the new rate if they plan to stay in the home, which may be lower than the fixed-rate they were initially paying, saving them even more. If the new rate is higher, they could attempt to refinance to a lower rate.
7/1 ARM vs. 5/1 ARM
The difference between a 7/1 ARM and a 5/1 ARM is the length of the initial fixed-rate term. One is seven years long and one is five years long. Typically, 7/1 ARMs will have slightly higher rates than 5/1 ARMs because the term is longer.
There are a few reasons why someone might choose a 5/1 ARM over a 7/1 ARM. The first reason is knowing that you’re only going to be in your home for five years, not seven. The lower rates of a 5/1 ARM can help save more during that initial rate period.
Another reason is that you might want the lower rate between a 5/1 ARM and a 7/1 ARM and are willing to take a gamble that rates will go down after the five years are over. There might also be different credit score requirements for a 7/1 ARM versus a 5/1 ARM, which could also influence your decision.
7/1 ARM vs. 15-year fixed mortgage
A 15-year fixed mortgage typically has the lowest rates out of most typically offered mortgage products. That’s because a homebuyer may put down a larger down payment or be willing to pay higher monthly payments throughout the term of the loan. The shorter overall time frame of the loan lowers the rate.
A 15-year fixed-rate mortgage is a great choice for homeowners who want to be in their homes long-term and can afford to make a higher down payment or higher monthly payments over the life of a loan. You’ll save significantly over the long term and will have to deal with a loan for a shorter amount of time. Typically, 7/1 ARMs are 30-year loans, so if you want to pay off your loan quickly, a 15-year fixed mortgage is the way to go.
If you’re not sure how long you’ll be in your home, or if you can’t afford to make a higher down payment or higher monthly payments, then a 7/1 ARM would make more sense.
Tip: When buying a home, if there’s any way you can afford the payment requirements for a 15-year fixed mortgage, try to make this your mortgage choice to maximize savings on interest.
7/1 ARM vs. 30-year fixed mortgage
With a 30-year fixed mortgage, you’re locking in one rate over the life of the loan. This could be a good option for homeowners who don’t want to risk their rates going up over time and who plan to make their new home their forever home. Loan payments are predictable with a 30-year fixed mortgage, which may be the peace of mind some homeowners want.
If you’re not tied to your home and want lower rates over the first seven years, a 7/1 ARM is a nice option. Your rates might go down after the first seven years, which means you’d save more over the length of the loan anyway. If they go up, you can sell your home or attempt to refinance your loan.
If you know your home is a short-term home, then a 7/1 ARM makes more sense than a 30-year fixed mortgage. You may as well save on interest while you’re living in the home rather than paying extra.
The final word
When you’re buying a home, consider a 7/1 ARM, especially if you’re not sure if the home is your forever home. You can save on interest with 7/1 ARM rates over the short-term, and you may save more if rates go down after the first seven years. Compare the best 7/1 ARM rates and lender requirements to find a loan that makes sense for your financial situation.