# How Do 7/1 Arm Mortgages Work?

A 7-year adjustable-rate mortgage has an interest rate that is "fixed" for the first 7 years (84 payments) and then adjusts annually for the next 23 years. The 7/1 interest rate is usually lower than the 30-year interest rate. The benefit is a lower monthly mortgage payment (at least for the first 84 months) & higher borrowing capacity. The interest rate adjustment is based on a predetermined formula.

## 7/1 ARM mortgage rates

Q. What is the difference between a 5/1 arm and a 7/1 arm?
A. The 5/1 ARM has a fixed interest rate for the first 5 years (60 payments). The 7/1 ARM has a fixed-rate for the first 7 years (84 payments). The interest rate adjusts annually after the fixed-rate term.

Q. What is the qualifying rate on a 7/1 arm?
A. According to Fannie Mae (Federal National Mortgage Association), the qualifying rate on a 7/1 ARM is the greater of the note rate (initial interest rate) or the fully indexed rate.

Q. What is a 7/1 ARM interest only?
A. The interest only 7/1 ARM has a fixed-rate for the first seven years, but only the interest part of the mortgage payment is required.

Q. What is a 7/1 arm jumbo loan?
A. A jumbo loan is a loan that exceeds the lending limit of Fannie Mae and the Federal Home Loan Mortgage Corporation (Freddie Mac).

Q. How to calculate a 7/1 arm mortgage payment
A. Use a payment calculator and calculate the monthly payment based on a 30-year term with the 7/1 arm interest rate.

Q. Can a 7/1 arm be refinanced?
A. Yes. Many home buyers use the 7/1 arm to qualify for a more expensive house and will then refinance the 7/1 arm within the 7year period.

Q. Does FHA offer a 7/1 ARM?
A. Yes, although, the 7/1 arm is not originated directly from the FHA, but through approved lenders. The FHA permits lenders to offer two-adjustment options:

the interest rate on the FHA 7/1 ARM can increase only one percentage point annually, and five percentage points over the life of the mortgage; or
the interest rate can increase of two percentage points annually, and six points over the life of the mortgage.

Q. What are the disadvantages of the 7/1 ARM loan?
A. The obvious disadvantage of the 7/1 ARM loan is that after the first 7 years, the monthly payment can increase every year if the interest rate goes up. It may be hard to come up the extra money every month for a higher monthly payment if your income doesn't increase along with the rates.

The "new" interest rate is defined in the mortgage agreement. The adjustment is based on a formula using an index for the previous 52 weeks. However, the 7/1 ARM usually "caps" the maximum interest rate increase to one or two percent over the previous year and limits the total interest rate limit to 5 percent over the initial interest rate.

Q. Why use a 7/1 arm?
A. Will you live in your house for less than seven years? If so, you will save money by choosing the 7/1 ARM because the interest rate is less than a 30-year fixed-rate mortgage. The 7/1 arm is a popular choice for employees who are frequently transferred.

Do you want (or need) to qualify for a larger loan? The lower initial interest rate of a 7/1 arm can help you qualify for a bigger loan, which means you can purchase a more expensive house.

Because the 7/1 arm provides a lower monthly payment for the first 7 years, the savings can be used for college savings, investments, retirement, home expenses, etc.