A 7/1 ARM is a mortgage that is commonly offered in the home loan industry today. This type of mortgage is considered a hybrid mortgage because it shares features of fixed-rate and adjustable-rate mortgages. Here are the basics of the 7/1 ARM.

Fixed-Rate Period

At the beginning of a 7/1 ARM, you will enjoy 7 years of a fixed interest rate. This rate is not affected by anything that is going on outside in the market once it is locked in. This portion of the loan is very similar to a traditional 30-year fixed-rate loan. Typically, the introductory rate on a 7/1 ARM is going to be lower than the rates that are currently being offered with a traditional 30-year fixed-rate loan.

Adjustable Rate Period

After the initial seven-year period is up, the interest rate is going to fluctuate. Every year, the interest rate on your loan will be reevaluated based on the movement of an underlying financial index. The index might be the one-year Treasury rate. If this rate goes up, your monthly mortgage payment is going to go up as well. If the rate goes down, your payment will decrease. Therefore, you will have 12 months at a time of the same mortgage payment, and then your payment is going to change for the next 12 months.

Interest Rate Caps

Although your interest rate can increase, there are typically interest rate caps in play with this type of loan. This means that on a year-to-year basis, your interest rate can increase by only a maximum amount. For example, the interest rate might be allowed to increase only a maximum of 2 percent per year with a maximum of 5 percent over the life of the loan. This provides you with some sort of protection against increasing interest rates in the market over the long term.

Using the 7/1 ARM

This type of loan is definitely not for every home buyer. However, there are some buyers that can benefit from this type of mortgage. With the 7/1 ARM, you are getting a much lower initial payment than you would be able to with another type of mortgage. This gives you seven years of lower payments to take advantage of. If you do not plan on being in your house for longer than seven years, this could be a great mortgage for you. It can save you some money on a house, or it could eventually allow you to purchase a bigger house than you could otherwise afford.

Cautions

When using this type of mortgage, you will want to make sure that you are careful. You need to look at how much the mortgage payment could increase over the life of the loan instead of simply focusing on the small initial mortgage payment. Otherwise, you might get in over your head with a mortgage that you cannot afford for the long term.

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