What Is a 7/1 Adjustable-Rate Mortgage (ARM)?

7/1 ARM Meaning, Requirements, Pros, and Cons

When you’re preparing to buy a home, you have to choose which mortgage type you’re interested in and whether to opt for a fixed rate or an adjustable rate. If you decide to go with an adjustable-rate mortgage (ARM), there are different types of those, as well. For example, you might consider a 7/1 ARM that starts with a fixed rate but can change later on.

But how do you know if a 7/1 ARM is right for you? Let’s explore how a 7/1 ARM functions and its potential benefits and drawbacks.

What Is a 7/1 ARM?

A 7/1 ARM is a type of adjustable-rate mortgage that has a fixed interest rate for the first seven years. After that, the loan will undergo an annual rate adjustment for the remainder of the loan term. 7/1 ARMs offer an initial interest rate that’s typically lower than those of standard fixed-rate mortgages, where you have the same rate for the loan’s entire term.

Annual rate adjustments can go up, down or stay the same and may result in an increase or decrease to your monthly mortgage payment. There are several types of ARMs, all classified by two numbers, like 7/1, which indicate the length of the fixed period and the frequency of rate changes.

How Does a 7/1 ARM Work?

To understand how a 7/1 ARM works, there are two phases to be aware of:

1. Fixed period: For the first seven years after closing on your 7/1 ARM, you’ll have a fixed interest rate, which means more predictable monthly mortgage payments.
2. Adjustable period: Beginning year eight of your loan, your interest rate will adjust annually. Each new rate is determined by adding your lender’s fixed margin to the market index your loan is tied to, such as the Secured Overnight Financing Rate (SOFR) or Constant Maturity Treasury (CMT).

The thought of potential rate hikes after seven years might seem like a big risk to take. However, rate caps can offer some security by limiting how much your rate can increase (or decrease, for that matter). Rate caps are usually presented as a series of three numbers, like 2/2/5.

Using the 2/2/5 example, the first 2 represents the initial adjustment cap, which limits the first rate increase or decrease to a maximum of 2%. The second 2 represents the periodic or subsequent adjustment cap, which limits how much the rate can change each year. And the 5 represents the lifetime adjustment cap, which limits how much the rate can rise or fall over the life of the loan.

7/1 ARM Example

To understand what a 7/1 ARM might look like, here’s an example:

Say you decide to buy a home using a 7/1 ARM for a 30-year term. The loan has an initial interest rate of 6.15% tied to the CMT and includes 2/2/5 rate caps.

Here’s how your monthly principal and interest payments on your mortgage might look if rates rise after the 7-year fixed period:

• Years 1–7: $2,132 (initial fixed payment)
• Years 8+: $2,527 (possible new payment at the first allowed increase)
• Maximum: $3,142 (highest possible payment if rates hit the lifetime cap)

Keep in mind, rate caps don’t just limit increases. They also limit how much your rate (and monthly payment) can go down. This means your payment could decrease if interest rates fall, but no more than the 2/2/5 caps.

Pros and Cons of 7/1 ARM Loans

The type of mortgage you choose is one of the biggest financial decisions you’ll ever make, so it’s important to weigh the potential pros and cons before applying to get a 7/1 ARM:

Who Are 7/1 Adjustable-Rate Mortgages Best For?

Some homebuyers may be well-suited for a 7/1 ARM despite the potential for higher payments down the road. This could be the case if you’re:

• Planning to sell or refinance: If you expect to sell your home or refinance before the seven-year fixed period is up, you can enjoy the lower initial rate without worrying too much about future adjustments. For example, some borrowers may opt for a 7/1 ARM when rates are low, with a plan to refinance before their rate could go up.
• Expecting higher earnings: If your income is likely to grow, you may feel more confident taking on potentially higher payments later. But be aware of your rate caps and what could happen if your income doesn’t increase as expected.
• Open to flexibility: If you’re comfortable balancing lower upfront costs with the possibility of higher payments later, a 7/1 ARM may align with your financial strategy.

A 7/1 ARM can usually be a good fit for buyers who understand how they work, are comfortable with the potential long-term risks, and want to take advantage of a set interest rate for seven years. Compare your loan options to figure out what’s best for you.

7/1 ARM Loan Requirements

If you think a 7/1 ARM is the right type of mortgage for you, there are some requirements and other considerations to keep in mind:

• Loan type: Not all types of mortgages can be 7/1 ARMs., They’re typically conventional or FHA loans. Each loan type has its own specific requirements to consider.
• Credit score and income: The required minimum credit score will vary from lender to lender. At Freedom Mortgage, we typically look for a score of 620 or higher for conventional loans, and at least 550 for FHA loans. You’ll also have to prove you have a stable income and can comfortably afford the mortgage payments.
• Down payment: You’ll likely need to make a down payment of at least 3.5%–5% of the purchase price, depending on the type of loan (conventional or FHA). You can always make a larger down payment to help lower the monthly payment amount.
• Debt-to-income ratio (DTI): Lenders typically prefer a DTI that’s 43% or less, but this number can vary by lender and loan type.

Alternatives to 7/1 ARMs

If you’re unsure about a 7/1 ARM, there are other mortgage options that might be a better fit:

Other types of ARMs offer shorter or longer fixed periods, which may better match your timeline and situation. For example, a 5/1 ARM could start with an even lower rate, while a 10/1 ARM provides more years of payment stability.

Fixed-rate mortgages offer stable payments for the life of the loan. A 30-year fixed-rate mortgage might be good if you plan to stay in the home for a long time and want more predictable payments, while a 15-year fixed-rate loan can offer lower interest rates (but higher monthly payments).

Compare factors like your eligibility, down payment requirements, interest rates, repayment periods, and potential monthly mortgage payments to get an idea of what best matches your needs.

7/1 ARM FAQs

Here are answers to some commonly asked questions about 7/1 ARMs:

Can You Refinance a 7/1 ARM?

Yes, you can refinance a 7/1 ARM. You could refinance into another type of ARM or a fixed-rate mortgage, and you can refinance before the fixed seven-year period of your 7/1 ARM ends if you meet your lender’s financial requirements.

Is a 7/1 ARM a 30-Year Mortgage?

Most adjustable-rate mortgages are 30-year loans. With a 7/1 ARM, you’d likely have a fixed rate for the first seven years and an adjustable rate for the other 23 years of the loan term.

Can You Pay off a 7/1 ARM Early?

You may be able to pay off your 7/1 ARM loan early. However, check with your lender about its requirements and any potential prepayment penalties.

Is a 7/1 ARM a Good Idea?

A 7/1 ARM can be a smart choice if interest rates are favorable and you plan to sell or refinance before the fixed period ends. It might also be a good idea if your income is expected to increase, making the potential for higher rates a less significant concern. Meanwhile, if you want long-term stability and more predictable payments, a fixed-rate loan may be more up your alley.

Final Thoughts: 7/1 Adjustable-Rate Mortgages

A 7/1 ARM initially offers a balance of flexibility and lower payments, which can be attractive to some buyers—but it isn’t the right option for everyone. If you’re comfortable with some risk or confident in your plans to refinance or sell before the end of the fixed period, a 7/1 ARM could save you money thanks to the lower initial interest rate.

Whether your goals align with a 7/1 ARM or the long-term stability of a fixed-rate mortgage, Freedom Mortgage can help you get started today on finding the right loan for you.