What Is a 7/6 Adjustable-Rate Mortgage?

How To Choose if a 7/6 ARM Is Right for You

Adjustable-rate mortgages can be a great option for some people when used in the right situations. You may have heard of them before but you may not be familiar with the types of ARMs available to you, such as a 7/6 ARM.

How does a 7/6 adjustable-rate mortgage (ARM) work? Could it help you save money? What would your monthly payments look like?

We're here to help with this guide.

How Does a 7/6 ARM Work?

A 7/6 ARM works basically like other adjustable-rate mortgages, such as the 5/1 and the 7/1, in that the first number represents the number of years your interest rate will remain fixed. However, with 5/1 and 7/1 ARMs, the "1" means your rate will go up or down once a year after the initial fixed-rate period. With a 7/6 ARM, the "6" means your interest rate will fluctuate every six months.

Repayment periods for 7/6 ARMs can vary by loan or lender, usually running 15, 20, or 30 years. So, one lender may offer a 7/6 ARM with a 30-year term while another offers a 7/6 ARM with a 20-year term.

In addition to impacting the loan's interest rates during the fixed and adjustable periods, the repayment period will impact your monthly payment. Typically, the longer the repayment period, the lower the monthly payment, but you'll usually have a higher interest rate and pay more in interest over the life of the loan.

7/6 ARM Fixed-Rate Period

For the first seven years of a 7/6 ARM, your interest rate is fixed. Your mortgage rate is locked in and can't increase or decrease until the eighth year. This can provide homeowners with predictable and stable monthly payments that allow for better budgeting and potential savings from rate drops.

7/6 ARM Adjustment Period

When a 7/6 adjustable mortgage's fixed period ends, your interest rate can then stay the same or go up or down every six months. This can lead to unpredictable payments based on factors like market conditions, which can raise or lower your monthly payment.

7/6 ARM Rates

Interest rates for a 7/6 ARM tend to be lower starting out than those of 30-year fixed-rate mortgage of the same term length, but how much lower depends on the lender and market conditions. After the initial rate period, an ARM could have a higher rate than a fixed-rate loan.

In some cases, a homeowner may refinance to a 7/6 ARM to take advantage of savings from a rate drop. Once the seven-year period is over, you may consider refinancing again based on your adjusted interest rate.

7/6 ARM Rate Caps and Floors

With variable-rate loans, like a 7/6 ARM, consumer protections limit how much the rate can change during the adjustment period.

Here's an example of a 7/6 ARM with a cap of 5/1/5:

• 5: The first number limits how much the rate can change during the initial adjustment. In this example, it can't change by more than 5%. Someone with a 7% initial rate may see their rate adjust to no more than 12% and no lower than 2%.
• 1: The second number tells how much the rate can change in each of the next adjustment periods. With the 5/1/5 example, the rate on a 7/6 ARM can only change by 1% every six months.
• 5: The last number is the maximum increase or decrease that can occur over the life of the loan. The 5/1/5 example on a 7% loan means the rate can't ever get higher than 12% or lower than 2%.

While the 5/1/5 cap is common, it can vary from borrower to borrower.

The other side of rate caps is rate floors, which limit how low a rate can go during adjustments. Sometimes, it may be your initial rate, but it may also be another set number. For example, you may get a 7/6 ARM with a 7% introductory rate and a loan floor set at 3.5%, which means this is the lowest rate your loan can ever have. Your mortgage lender will explain rate caps and floors when you apply for an ARM.

7/6 ARM Qualifications

As with other mortgages, you'll need to meet some basic qualifications to get a 7/6 ARM. Like with other loan types, the requirements can depend on a few factors, such as:

• Credit score: Lenders typically require a credit score of around 620 for an ARM connected to a conventional loan. However, this minimum can vary from one lender to another and based on loan type. For example, at Freedom Mortgage, you may be able to qualify for an FHA loan with a credit score as low as 550.
• Debt-to-income ratio (DTI): Lenders will also want to see a "good" debt-to-income ratio, which shows how much of your income goes toward debt. The maximum DTI allowed for loan approval can vary, but a DTI of 43% or below may improve your chances.
• Down payment: You'll likely need to make a down payment on your house, too, which typically ranges between a minimum of 3.5%–5% of the purchase price, depending on the lender and the type of loan. You can always pay more to lower your monthly payments and—in the case of a conventional loan—potentially eliminate private mortgage insurance (PMI).
• Loan-to-value (LTV) ratio: Your loan-to-value ratio is a factor that shows how much you need to borrow compared to the value of the home. A higher LTV means more risk for the lender, and it could mean a higher rate for you.
• Proof of income: All lenders will want to see that you have steady income, which suggests an ability to afford monthly mortgage payments.

Review your finances to get a better understanding of your approval odds and consider getting prequalified as the next step toward securing your new loan.

7/6 ARM Pros and Cons

To decide if a 7/6 ARM is right for you, consider the potential pros and cons.

Advantages may include:

• Lower initial payments: With a lower introductory interest rate, you'll have a lower monthly mortgage payment.
• Potential savings: With lower interest for seven years, you may be able to save money during the fixed-rate period.
• Flexibility: Many people who use an adjustable-rate mortgage plan on selling or refinancing before the adjustable period, allowing them to take advantage of low rates.

Disadvantages may include:

• Changing circumstances: Things can change, and you may find yourself needing to stay where you are for a bit longer than you planned to live there. This means you could face the rates changing on you.
• Unpredictable mortgage payments: As rates change, your mortgage payment changes, too, which can make budgeting harder. 7/6 ARM rates change every six months, which can be especially difficult.
• Complex loan terms: Since ARMs have changing terms, you have to keep track of how much longer you have a fixed interest rate and what your rate cap or floor could be.

Keep in mind: If you determine a 7/6 ARM isn't right for you, there are other adjustable-rate options that could be a better fit.

When Should You Choose a 7/6 ARM?

There are a few common scenarios where you might opt for a 7/6 adjustable home loan:

• You don't plan to stay in your home for more than seven years.
• You plan to refinance before the adjustable-rate period kicks in.
• You expect interest rates to start a downward trend by the time your fixed-rate period ends.
• You expect your income to increase significantly, allowing you to take on higher monthly payments if needed.

Final Thoughts: 7/6 Adjustable-Rate Mortgages

A 7/6 ARM can be a good choice for some homebuyers who want to take advantage of a lower initial rate, but it does come with a little risk. Unless you sell your home within the fixed-rate period or plan to refinance, you could face higher interest rates when the adjustment kicks in.

It's always a good idea to look at all your options before making a decision, and talking with a mortgage specialist is a great place to start. If you're ready to begin the homebuyer journey, get prequalified today.