How Do 7/1 Arm Mortgages Work?

Written by Anytime EstimateFebruary 9th, 20223 minute read

A 7-year adjustable-rate mortgage (7/1 ARM) has an interest rate that is "fixed" for the first 7 years (84 payments) and then adjusts annually for the next 23 years.

The 7/1 interest rate is usually lower than the 30-year interest rate. That means a 7/1ARM has a lower monthly mortgage payment — at least for the first 84 months — and higher borrowing capacity.

The interest rate adjustment is based on a predetermined formula.

Frequently Asked Questions About 7/1 ARMs

What is the difference between a 5/1 ARM and a 7/1 ARM?

The 5/1 ARM has a fixed interest rate for the first 5 years (60 payments). The 7/1 ARM has a fixed-rate for the first 7 years (84 payments). The interest rate adjusts annually after the fixed-rate term.

What is the qualifying rate on a 7/1 ARM?

According to Fannie Mae (Federal National Mortgage Association), the qualifying rate on a 7/1 ARM is the greater of the note rate (initial interest rate) or the fully indexed rate.

What is a 7/1 ARM interest only?

The interest only 7/1 ARM has a fixed-rate for the first seven years — but only the interest part of the mortgage payment is required.

What is a 7/1 ARM jumbo loan?

A jumbo loan is a loan that exceeds the lending limit of Fannie Mae and the Federal Home Loan Mortgage Corporation (Freddie Mac).

How can I calculate a 7/1 ARM mortgage payment?

Use a payment calculator and calculate the monthly payment based on a 30-year term with the 7/1 ARM interest rate.

Can I refinance a 7/1 ARM?

A. Yes. Many home buyers use the 7/1 ARM to qualify for a more expensive house and will then refinance the 7/1 ARM within the seven year period.

Does FHA offer a 7/1 ARM?

Yes, although, the 7/1 ARM is not originated directly from the FHA, but through approved lenders.

The FHA permits lenders to offer two-adjustment options:

  • The interest rate on the FHA 7/1 ARM can increase only 1% annually, and 5% over the life of the mortgage
  • The interest rate can increase of 2% annually, and 6% over the life of the mortgage

What are the disadvantages of the 7/1 ARM loan?

The obvious disadvantage of the 7/1 ARM loan is that after the first seven years, the monthly payment can increase every year if the interest rate goes up.

It may be hard to come up the extra money every month for a higher monthly payment if your income doesn't increase along with the rates.

The "new" interest rate is defined in the mortgage agreement. The adjustment is based on a formula using an index for the previous 52 weeks.

However, the 7/1 ARM usually "caps" the maximum interest rate increase to 1-2% over the previous year and limits the total interest rate limit to 5% over the initial interest rate.

Why should you use a 7/1 ARM?

Will you live in your house for less than seven years? If so, you will save money by choosing the 7/1 ARM because the interest rate is less than a 30-year fixed-rate mortgage. For that reason, the 7/1 ARM is a popular choice for employees who are frequently transferred.

Do you want (or need) to qualify for a larger loan? The lower initial interest rate of a 7/1 ARM can help you qualify for a bigger loan, which means you can purchase a more expensive house.

Because the 7/1 ARM provides a lower monthly payment for the first seven years, the savings can be used for college savings, investments, retirement, home expenses, and more.