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What Is A 7/6 ARM?

Melissa Brock6-minute read
UPDATED: January 06, 2023

There are many different types of mortgages, including fixed- and adjustable-rate mortgages (ARMs). Fixed rate mortgages have interest rates that stay the same throughout the life of the loan. Interest rates for adjustable-rate mortgages, like the 7/6 ARM, change periodically.

What is a 7/6 ARM, exactly, and how does it work? Read on to find out.

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7/6 ARM Meaning

An adjustable-rate mortgage is a type of mortgage that offers a lower interest rate for a specific introductory period, then adjusts the interest rate up or down depending on certain market factors. After the introductory period, the interest rate can change throughout the life of the loan.

A 7/6 ARM is a type of adjustable-rate loan.

In this type of home loan, the “7” is the introductory period, which means the interest rate stays the same, or fixed, for 7 years. After that time, the interest rate can adjust every 6 months, which represents the "6" in 7/6. This is called the adjustment interval.

How Does A 7/6 ARM Work?

Let's take a look at how a 7/6 ARM works for mortgage borrowers, including rates, rate caps and floors, adjustment intervals, indexes and margins.

7/6 ARM Rates

7/6 ARM rates refer to the interest rate on the mortgage, or the amount a lender charges a borrower as a percentage of the total loan amount. The total loan amount is also called the principal.

With a 7/6 ARM, the initial interest rate stays the same for 7 years. After the 7 years is up, the interest rate adjusts every 6 months for the remaining loan term. This is called the variable interest rate portion of your loan. At that point, you’ll be subject to different interest rates and your mortgage payments may change.

Several factors can affect the interest rate on a 7/6 ARM, especially after the initial 7-year period is up. It’s important to note that interest rates could increase quite a bit during the variable interest rate portion of your loan, which could make it challenging for a borrower to pay in full every month if they aren’t prepared.

Rate Caps And Floors

You'll also need to know the fine print on a 7/6 ARM and, in particular, information on interest rate caps and floors. Interest rate caps and floors limit how much your rate and mortgage payment increases or decreases on your loan.

Rate caps are applied to most ARM loans to keep the interest rate and subsequent mortgage payments more manageable. The limits are expressed as a percentage increase from the initial fixed rate.

  • Initial adjustment cap: The initial interest rate cap refers to the maximum amount that an interest rate can adjust up or down during the first scheduled rate adjustment. Initial interest rate caps protect borrowers from experiencing a huge rate jump the first time the interest rate is scheduled to change.
  • Periodic adjustment cap: A periodic adjustment cap refers to the maximum amount an interest rate can adjust during a particular period of an ARM. Similar to an initial adjustment cap, the periodic adjustment cap limits the interest rate so borrowers don't experience a huge rate jump during any particular interval.
  • Lifetime adjustment cap: The lifetime adjustment cap, another rate change cap, puts a limit on the amount an interest rate can increase over the life of a loan. By law, most ARMs carry a lifetime limit. However, there is no limit to the amount a rate can adjust down over the life of a loan.

Adjustment Interval

The adjustment interval, also called an adjustment period, is the duration between changes in the interest rate on the loan. In the case of a 7/6 ARM, the adjustment interval is 6 months.

Index And Margin

An ARM index refers to a benchmark interest rate that lenders use to base ARM rates and determine how your interest rate may change. Several popular indexes are tied to a 7/6 ARM, including the following:

  • Constant Maturity Treasury (CMT) rate and U.S. Treasury
  • Cost of Funds Index (COFI)
  • Secured Overnight Financing Rate (SOFR)

The margin is another factor that plays into the interest rate on an ARM. It's a base percentage added onto the index rate. It could be a flat percentage or it may hinge on your credit score. The higher your credit score, the lower your margin rate will be.

The index and margin can make a difference in how much you pay over the life of your loan, but it's important to consider all the factors involved in choosing a mortgage.

7/6 Adjustable-Rate Mortgage Qualifications

Before you choose the right mortgage type for you, it's a good idea to look into the borrower requirements, including credit score, debt-to-income ratio (DTI), loan-to-value ratio and income requirements.

  • Credit score: You'll need a minimum credit score of 620 to qualify for a 7/6 ARM.
  • Debt-to-income ratio (DTI): Your lender will take a look at your DTI, which is your fixed monthly debt divided by your gross monthly income, turned into a percentage. To qualify for a 7/6 ARM, your DTI should be no higher than 50%.
  • Loan-to-value ratio (LTV): LTV measures the percentage of the appraised value of a home against the loan amount you want to borrow. Your maximum LTV can be 95%.
  • Income requirements: Your lender will also take your household income into consideration. There's no overarching income minimum to buy a home, but you need to demonstrate that you can make your loan payments, especially when the interest rate adjusts.

Pros And Cons Of A 7/6 ARM

What are the advantages and disadvantages of taking out this type of home loan? Let's find out.

7/6 ARM Pros

Let's take a look at a few advantages of taking out a 7/6 adjustable-rate mortgage:

  • Lower initial interest rate: In the first 7 years of a 7/6 ARM, you can likely take advantage of a lower initial interest rate than a standard fixed-rate loan.
  • Lower initial mortgage payments: Due to the lower interest rate involved with the first 7 years of an ARM, you could benefit from lower initial mortgage payments. And you'll know your principal and interest payment every month for 7 years.
  • Ability to save money on interest if you move or refinance: You may want to consider opting for a 7/6 ARM if you know you'll move or refinance to a lower rate before the 7-year initial interest rate period is up.

7/6 ARM Cons

It's worth exploring the disadvantages of taking out a 7/6 ARM before you choose to go that route:

  • Interest rates can increase after the fixed period ends: Unlike a fixed-rate loan, the fixed-rate period on an ARM will eventually end. After 7 years, you're subject to the whims of the market (within the parameters of caps and floors). You may pay more on a monthly basis than you did during your initial 7-rate period.
  • Potential prepayment penalties: A prepayment penalty is a fee that your lender may charge you if you choose to pay off your loan early. It's a good idea to check if your lender requires a prepayment penalty if you're considering getting a 7/6 ARM and paying it off immediately after the initial fixed-rate period ends.
  • ARMs can be difficult to understand: Rate caps, indexes, margin – ARMs are complicated compared to the consistency of fixed-rate mortgages. One of the best things you can do is ask your lender questions about 7/6 ARMs and what you can expect on a month-to-month basis. Ask about rules, fees and payment structures.

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When Does A 7/6 ARM Make Sense?

When might it make the most sense for borrowers to take out a 7/6 ARM? Let's take a look.

  • If you plan on staying in the house for a short amount of time: If you don't plan to stay in the house for an extended period of time, a 7/6 ARM may make sense for your needs because you can enjoy the low interest rate and move before it has the potential to go up.
  • If you want to refinance to a fixed-rate mortgage: You can switch to a fixed-rate mortgage by refinancing. A refinance means that you trade in your mortgage for a new one with a fixed loan term. If you do this, you'll benefit from a low fixed rate for the first 7 years of a 7/6 ARM. You can then refinance to avoid the fluctuating interest rate and monthly payment for the remaining loan term. Remember that a refinance doesn’t guarantee a rate that’s lower or equal to what you were paying. It also involves paying closing costs, so it won't be free to refinance your loan.
  • If you expect your income to increase: Taking out a 7/6 ARM may make sense if you know that your income will increase. An income increase will make it more likely that you'll be able to cover your monthly mortgage payments, even if your interest rate increases.

It's important to think about how you may feel after the initial introductory period is up. If you're concerned about the relative uncertainty of an ARM, it may not be the right type of loan for you.

The Bottom Line

If you have a low credit score, high debt or inconsistent income, a 7/6 ARM might not be a good match for you. On the other hand, if you meet the requirements and think you'll feel comfortable with the adjustment interval of a 7/6 loan, you might want to opt for this type of mortgage.

Interested in taking out a 7/6 ARM to finance a house? Get initial mortgage approval online.

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Melissa Brock

Melissa Brock is a freelance writer and editor who writes about higher education, trading, investing, personal finance, cryptocurrency, mortgages and insurance. Melissa also writes SEO-driven blog copy for independent educational consultants and runs her website, College Money Tips, to help families navigate the college journey. She spent 12 years in the admission office at her alma mater.