A 7/1 ARM (adjustable-rate mortgage) is a loan that has a fixed interest rate for the first seven years, followed by annual interest rate adjustments for the next 22 years of the 30-year mortgage term.
With a 7/1 ARM, the interest rate you have for the first seven years is generally lower than the average available rate. But there is no guarantee on whether or not your rate adjustments for the next 23 years of your mortgage term will be higher or lower than what you started with.
For example, if you use a 7/1 ARM to borrow $300,000 with an introductory rate of 5.25%, your monthly principal and interest might be about $1,200. After year seven, the rate can rise or fall once per year, based on a benchmark index (like the SOFR) plus a fixed margin. That means that your payment will likely either go up or down every year for the remainder of your mortgage depending on market conditions. This is why 7/1 ARMs are usually popular with borrowers who don’t expect to keep the loan long term.
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How does a 7/1 ARM loan work?
A 7-year adjustable-rate mortgage (7/1 ARM) has an interest rate that is "fixed" for the first seven years (84 payments) and then adjusts annually for the next 23 years. The initial rate, known as a teaser rate, is usually lower than prevailing rates for comparable fixed-rate products, like the 30-year fixed-rate mortgage.
A 7/1 ARM may appeal to home buyers that want to purchase a home but need a lower interest rate and monthly payment at the beginning of the loan. Those who will sell or refinance their home soon or expect their income to increase in the near future might benefit from this kind of loan. Still, there's always the risk that you won't be able to sell or rates will be even higher when it's time to refinance at the end of the 7-year period. That is the primary disadvantage with 7/1 arm loans—it's a bit of a gamble.
What's the 7/1 ARM mortgage rate?
You can compare 7/1 ARM rate estimates on sites like Zillow. But your lender will set the actual rate, based on the sum of the margin and an index rate. The rate will be reflected in your loan contract. Your loan contract details terms such as the following:
- Teaser interest rate
- Loan reset date
- How often your interest rate adjusts
- What factors and limitations can affect your interest rate (such as an index or interest rate cap)
Always consult with a mortgage lender to get an accurate idea of what 7/1 arm rates are available to you.
When should you consider a 7/1 ARM?
A 7/1 ARM is best for home buyers who want a lower initial monthly payment and expect their homeownership situation to change within seven years in one of the following ways.
Moving within 7 years
If you'll sell your home before seven years, you may not want to pay a lot in terms of principal, interest, taxes, and insurance (PITI) for a property you won’t live in for long. An ARM can help preserve cash flow in case you’ll need another down payment for your next home when you decide to move.
Expecting a cash influx
When your 7/1 ARM interest rate increases, so will your monthly mortgage payments. More cash on hand means more security. If you're expecting any of the following to happen within the next seven years, you may feel ok with taking on the risk of a 7/1 ARM:
- An income increase (e.g., because of a new job or raise) that would enable you to cover a higher mortgage payment once your ARM resets after the first seven years
- A windfall (e.g., inheritance or settlement) that you could potentially pay your mortgage off with before the rate resets
Planning to refinance
Like moving, refinancing your home means you’ll get out of the 7/1 ARM loan while you still have the lower initial rate. You may switch to a more predictable, fixed-rate product or any other mortgage product that suits your needs. That said, there's no saying where rates will be seven years from now. They may be lower than your current rate or they could be higher. There are also other considerations that come with refinancing, including paying more closing costs and your loan term resetting.
When should you avoid a 7/1 ARM mortgage?
If you want long-term payment stability, expect to live in your home for decades, or have tight finances that would buckle under unexpected payment increases, you should probably avoid going with a 7/1 ARM mortgage. You might be happier with a more predictable loan structure, like a conventional loan or FHA loan. If you want to get a lower rate with one of these loans, you can try strengthening your credit, increase your down payment, or buy mortgage points to lower the rate.
7/1 ARM vs. fixed-rate mortgage
A 7/1 mortgage will only have seven years of a fixed interest rate, then the rate will adjust annually for the remaining 23 years of the loan. If you get a 30-year fixed-rate mortgage, then your interest rate (as well as monthly payments) will stay the same for the life of the loan.
Although rates for property taxes, insurance or special assessments could affect your overall monthly payment, it’s generally accepted that fixed mortgage payments are more predictable than payments on ARMs.
Generally, the introductory rate on a 7/1 will come in substantially lower than the rate for a 30-year fixed-rate mortgage. If you need a lower payment than the 30-year fixed rate is offering, then a 7/1 ARM might be better, although it comes with risk down the line.
If you choose a 7/1 ARM, make sure you have a plan in place should your interest rate increase after the initial 7-year period. As mentioned, common exits for this mortgage include a sale, refinance or the expectation of enough income to cover a higher mortgage.
What types of 7/1 ARM mortgages are out there?
Conventional 7/1 ARM
A conventional 7/1 ARM has a fixed interest rate for the first 7 years, then adjusts annually based on an index plus a lender margin. Caps limit how much the rate can change: an initial adjustment cap, subsequent annual caps, and a lifetime cap (often 5–6%).
- Down payments typically 5–20%, depending on credit
- PMI required if down payment is less than 20%
- Strong credit usually needed
- Origination rates are often lower than 30-year fixed mortgages
- Most conventional ARMs allow prepayment without penalties
Jumbo 7/1 ARM
Jumbo loans exceed Fannie Mae and Freddie Mac conforming loan limits. 7/1 ARM jumbo loans often have lower rates than 30-year fixed jumbo loans, but usually require larger down payments (20% or higher) and strong credit.
Interest-only 7/1 ARM
During the initial interest-only period (often 7–10 years), you pay only interest. Afterward, the loan converts to a fully amortizing ARM with principal and interest payments, and the rate adjusts annually. These loans typically require strong credit and larger down payments.
FHA 7/1 ARM
FHA 7/1 ARMs are offered through approved lenders and have two common cap structures:
- 1% annual adjustment limit with 5% lifetime cap
- 2% annual adjustment limit with 6% lifetime cap
FHA ARMs are easier to qualify for than conventional ARMs and are aimed at moderate-credit borrowers.
FAQ about 7/1 arm loans
What does a 7-year ARM mean?
A 7-year ARM means you'll have a mortgage that will have a fixed interest rate for seven years, then the interest rate will adjust annually based on the market for the remaining 23 years of the loan.
Is a 7/1 ARM a good idea?
A 7/1 ARM can be a good idea if you plan to exit the loan after the first seven years, either through a sale or refinance. Or they can be a good idea if you anticipate having additional money years from now to pay a higher mortgage note if your interest rate increases (or to pay off your loan completely).
What are 7/1 ARM rates today?
The 7/1 ARM floating interest rates are based on the margin (outlined in your loan agreement) and an index, which changes daily. Always check with you lender to get the best idea of what 7/1 ARM rates are avilable to you.
How much is a 7-year ARM?
The monthly payments on a 7/1 ARM are based on principal, interest, taxes, and insurance. When the rate resets after seven years, the floating interest rates are based on the margin (outlined in your loan agreement) and an index, which changes daily. This will have a significant impact on your total mortgage payment for the year.
Disclaimer: The information provided in this article is for informational purposes only. It is not intended as legal, financial, investment, or tax advice, and should not be relied upon as such. Consult a licensed financial advisor or tax professional regarding your personal financial situation before making any decisions.