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When you borrow money to purchase a home, you have the choice of a fixed-rate mortgage or an adjustable-rate mortgage (ARM). With a fixed-rate mortgage, your principal and interest payments are locked with an interest rate that never changes. An adjustable-rate mortgage, on the other hand, has payments that can and usually do change after the initial lock period. This might save you money in the short term, but can be very unpredictable long term.
A 7/1 ARM is a specific type of adjustable-rate mortgage in which the interest rate is locked in for the first seven years and then is adjusted once a year after that (7 means seven years of lock and 1 means that the loan's interest rate can change yearly thereafter). Borrowers who choose a 7/1 ARM get the benefits associated with an adjustable-rate mortgage, but have a longer term of predictability than, for example, a 5/1 ARM.
Here's an overview of what today's 7/1 adjustable-rate mortgage interest rates look like.
When you take out an adjustable-rate home loan, such as a 7/1 ARM, the starting interest rate is guaranteed for an initial period of time -- in this case, for seven years.
The rate is tied to a financial index, such as the LIBOR index, the prime rate, or the federal funds rate. After the initial seven-year period, your loan interest rate could adjust once per year with a 7/1 ARM. The adjustment depends on whether rates have risen or fallen on the index that the loan is tied to.
ARMs are structured so you repay your mortgage loan over a fixed period of time -- usually over 30 years. Your monthly payment amount is calculated to pay off your entire loan by the end of the loan term.
That means if interest rates go up, your payment will also rise because you'll need to cover more interest costs to pay off your loan. If interest rates go down, your payment could fall because less of your money will go towards interest costs.
This is in contrast to a fixed-rate mortgage where your interest rate and payment stay the same for the entire loan repayment period.
Most mortgage lenders charge lower starting rates for ARMs than they do for fixed-rate loans. The low introductory rate can make a 7/1 ARM attractive to buyers who want the lowest initial monthly payments.
Borrowers take on a financial risk with an ARM because the loan can become more expensive if rates rise. However, a 7/1 ARM presents less risk than a 5/1 ARM, which locks in your starting rate for a shorter period of time. It's common for ARM borrowers to refinance to a fixed-rate loan when the introductory period ends. There are usually limits to how much the rate can change and how high it can go overall. These limits will be described in your loan documents.
When comparing 7/1 ARM mortgage rates, you should obtain quotes from at least three different lenders. You can check with banks, credit unions, and mortgage brokers. If you do all your mortgage shopping within a short window, generally 14 days, it will essentially count as a single credit pull on your credit report, sparing you significant credit damage.
Pay attention to the starting interest rate, how high your payments could rise, loan origination fees, prepayment penalties, and other costs associated with the loan. Comparing the annual percentage rate (APR), which takes fees into account, can give you a better idea of total loan costs than looking at interest alone. Sometimes the lowest mortgage rates don't tell the complete picture.
RELATED: APR vs. interest rate
You should also make certain you're comparing 7/1 ARM loan offers only with other adjustable-rate mortgages in which your initial starting rate is locked in for seven years. If you compare a 7/1 ARM to a fixed-rate mortgage or a 5/1 ARM, you aren't comparing apples to apples. With a fixed-rate mortgage, you can often expect to pay a little more in interest upfront in exchange for predictability. 5/1 ARM rates may be a little lower to start with but the payment will adjust two years sooner.
For many borrowers, a 7/1 ARM is a good balance between risk and lower mortgage interest rates. Since you have seven years before the first rate adjustment, your balance will be lower. This can make it easier to refinance if rates have adjusted upward at the end of the seven years. A 7/1 ARM also makes sense if you want to keep payments as low as possible and you plan to sell before your rate changes.
If you would prefer to have the certainty of knowing your rate and monthly mortgage payment will stay the same over the life of the loan, a fixed-rate mortgage is a better option.
The historic era of super-low interest rates seems to have ended, borrowing costs have risen, and the cost of living is higher than it was just a few years ago. Every dollar matters, and you can protect more of your money by taking steps to get the best mortgage interest rate that you can.
A 7/1 ARM is an adjustable-rate mortgage in which your starting mortgage interest rate is fixed for seven years. The rate can then adjust up or down once per year, moving with a financial index chosen by the mortgage lender, and your total monthly payments would rise or fall along with it.
To find the best 7/1 ARM rates, get mortgage loan offers from several different mortgage lenders. Compare rates and terms to find out which offers the lowest total borrowing costs. Remember that the interest rate is only one factor. Fees are also very important. You can put yourself in the best position to get a competitive interest rate by improving your credit score and saving a bigger down payment.
A 7/1 ARM can be a good option if you are planning on refinancing or selling before the lock period ends. ARMs often have lower starting mortgage interest rates than their fixed-rate counterparts, which can be appealing if you don't plan to stay in the home forever. They can also be easier to qualify for, since the payment is lower, allowing for more external debt in your debt-to-income calculation.
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