Compare current ARM 7/1 mortgage rates
How does an ARM 7/1 work?
When you take out an adjustable rate home loan, such as an ARM 7/1, the initial starting rate is guaranteed for an initial period, in this case for seven years.
The rate is linked to a financial index, such as the LIBOR index or the prime rate or the federal fund rate. After the initial seven-year period, the interest rate on your loan could adjust once a year with an ARM 7/1. The adjustment depends on the rise or fall of the rates on the index to which the loan is linked.
ARMs are structured so that you pay off your mortgage over a fixed period, typically over 30 years. Your monthly payment amount is based on how much you would need to fully repay principal and interest over the life of your loan.
This means that if the interest rates go up, your payment will also go up because you will have to cover more interest costs to pay off your loan. If interest rates go down, your payment could go down because less of your money will go towards interest charges.
This is in contrast to a fixed rate mortgage where your rate and payment stay the same throughout the loan repayment period. Fixed rate mortgages are more risky for lenders because the rate you pay doesn’t go up even if the rates go up dramatically. For this reason, most mortgage lenders typically charge lower starting rates for ARMs than for fixed rate loans. The low introductory rate can make an ARM 7/1 attractive to buyers who want the lowest upfront monthly payments.
Unfortunately, borrowers are taking risks with an ARM because they could see their loan become more expensive if rates go up. However, an ARM 7/1 is less risky than an ARM 5/1, which locks in your starting rate for a shorter period of time. Nonetheless, borrowers should make sure that they can repay their loan even if the payments increase after the rate adjustment. Check your mortgage documents to see how high your payments could go, as there is usually a maximum rate.
How to Compare 7/1 ARM Mortgage Rates
When you compare 7/1 ARM mortgage rates, you should get quotes from at least three different lenders including banks, personal lenders, and online lenders. Look for ones that allow you to pre-qualify without affecting your credit score.
Pay attention to the starting interest rate, how much your payments might increase, loan origination fees, prepayment penalties, and other costs associated with the loan. Comparing the Annual Percentage Rate (APR), which takes into account fees, can give you a better idea of the total cost of the loan than just looking at interest.
You should also be sure to compare ARM 7/1 loan offers only with other variable rate mortgages where your initial starting rate is locked in for seven years. If you compare an ARM 7/1 to a fixed rate mortgage or an ARM 5/1, you are not comparing apples to apples. With a fixed rate mortgage, you can often expect to pay a little more interest up front in exchange for predictability. ARM 5/1 rates may be a bit lower initially, but you’ll have to worry about adjusting your payment two years earlier.