UPDATED: Jan 6, 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.
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.
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 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.
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.
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.
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:
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.
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.
What are the advantages and disadvantages of taking out this type of home loan? Let's find out.
Let's take a look at a few advantages of taking out a 7/6 adjustable-rate mortgage:
It's worth exploring the disadvantages of taking out a 7/6 ARM before you choose to go that route:
When might it make the most sense for borrowers to take out a 7/6 ARM? Let's take a look.
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.
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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