Save Money Taking Out This Loan Over and Over with the 7/1 ARM

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Who doesn’t want to save money on their mortgage payment? No one! A viable option for you could be a 7/1 ARM. This is an adjustable rate mortgage with a low fixed rate for the first seven years. The rate then adjusts annually after that. This type of loan could be a good fit for certain borrowers who want to enjoy a lower rate in the first several years of the mortgage. Many home buyers like the 7/1 ARM mortgage because it ensures them seven year of a home loan payment they know they can afford.

The 7/1 ARM is a hybrid mortgage that has both features of an ARM and a fixed mortgage. The major benefit for you is the rate is lower than a 30-year fixed rate mortgage for the initial seven years. The risk is that it will adjust after year seven is complete, and it can go higher or lower. Is this the loan for you? Keep reading to learn more about the 7/1 ARM so you can decide.

7/1 ARM Rates

The 7/1 adjustable rate mortgage is tied to one of several indexes which determined how much your interest rate will rise or fall each year. An index is an interest rate that is published regularly based upon investment returns, such as US Treasuries. The rates for these types of investments will change depending what the market conditions are. Most indexes upon which ARM loans are based will track the changes in either US or international interest rates.

The 7/1 provides you with security early on as you know you will have a low fixed rate for seven years. This can be desirable for some borrowers in some situations. For example, are you almost certain you will need to move before the ARM adjusts in seven years? Then getting an ARM often makes sense. Bear in mind that the average length of time home owners stay in a home is seven years anyway. But also know that your long-term plans can easily change. If you need to stay in that home for 10 years, there is a risk of paying a higher rate that you do not know for certain. The ARM also may fit for you if you are confident you will have a much higher income in five or seven years. If you are, for example, just out of MBA school, you can make a reasonable guess in some situations that your salary could be significantly higher by then.

How A 7/1 ARM Loan Can Help You Save

Selecting a 7/1 ARM can help you save early in the loan’s life. If you are buying a $200,000 home and put down 20%, you are borrowing $160,000. If that interest rate on that loan were 7%, you would pay $1064 for a fixed rate, 30-year loan. But a seven-year ARM could get you into the same loan with a 6.25% rate, which will save you almost $100 per month. This can really help people save money in the early years of the loan. But remember, you need to be sure you can afford potential higher payments after year 7. There are caps on how high the rate can go overall, and how high it can go each year, but those caps are quite high. But, remember that you will have a lower principal amount because you had a lower interest rate early in the mortgage.

Is the 7/1 ARM Low Rate Worth the Higher Risk?

Maybe. If you are confident you are going to stay in that home for a long time, you may want to lock in the lowest fixed rate you can. You certainly do not want to get stuck with a much higher mortgage in seven years, especially if you are nearing your retirement years. But how many Americans these days stay in a home for 20 years or 30 years? It happens, but most people move within seven to 10 years.

To decide which is the best option for you, it is important to really get a firm grasp on how likely you are to move in the coming years. Once you have that decided, it gives you an idea which is the best fit for you.

If you do decide to get a 7/1 ARM loan, you will enjoy that significantly lower payment for the first seven years. If you can, it is wise to take that extra money you could have been paying on a 30-year fixed rate loan and invest it. Just make certain that you will be able to afford the bigger payments if the worst happens and the interest rate on the loan spikes after year seven. Many homeowners that are seeking a cash-out mortgage refinance will be content with the 7/1 ARM rates as they are similar to the 30-year rates they are likely going to lose.

The last word on this subject is regarding your personal risk tolerance. If you are not the type who can live with some financial uncertainty, you may want to go for the fixed rate loan. But if you can tolerate some risk for reward, a 7/1 ARM may work for you.

 

 

References: https://www.lendingtree.com/glossary/what-is-7-year-arm

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