When buying a home, choosing the right mortgage can make a huge difference in your monthly payments and long-term financial goals. While most borrowers consider a 30-year fixed-rate mortgage, there’s another option that could save you money upfront—a 7/6 ARM (Adjustable-Rate Mortgage).
A 7/6 ARM offers a fixed interest rate for the first 7 years, after which the rate adjusts every 6 months based on market conditions. This loan can be a great choice for homebuyers who plan to move or refinance before the fixed period ends. Let’s understand What a 7/6 ARM is and how it works.
What Is a 7/6 ARM?
A 7/6 ARM is a type of adjustable-rate mortgage where the interest rate stays fixed for the first 7 years. After this period, the rate adjusts every 6 months based on a financial index chosen by the lender. The key advantage? Lower initial payments compared to a 30-year fixed-rate mortgage.
Here’s how the numbers break down:
- 7 = Fixed interest rate for the first 7 years
- 6 = Rate adjustments occur every 6 months after the fixed period
How Interest Rate Adjustments Work
Once the fixed period ends, your mortgage rate is recalculated based on:
- Index: A benchmark financial rate (e.g., the Secured Overnight Financing Rate (SOFR))
- Margin: A set percentage added by the lender
- Rate Caps: Limits on how much your rate can increase
For example, if your loan is advertised as 7/6 ARM 5/1/5, it means:
- Your rate won’t increase by more than 5% initially
- Future adjustments will be capped at 1% per period
- The lifetime interest rate increase is limited to 5% total
Pros and Cons of a 7/6 ARM
Before deciding, it’s important to weigh the benefits and risks.
Pros:
✅ Lower Initial Interest Rate – You’ll typically get a lower rate than a 30-year fixed loan, reducing your monthly payment for the first 7 years.
✅ Great for Short-Term Buyers – If you plan to sell or refinance before the first rate adjustment, you can take advantage of the lower payments without worrying about future rate hikes.
✅ Rate Caps Provide Protection – Even though your rate adjusts, there are limits to how much it can increase, preventing extreme payment jumps.
Cons:
❌ Potential Payment Shock – After 7 years, your rate could increase significantly, leading to higher monthly payments.
❌ Complex Loan Terms – Understanding how index rates, margins, and caps work is crucial before committing to an ARM.
❌ Not Ideal for Long-Term Stability – If you plan to stay in your home for more than 10 years, a fixed-rate loan might be a safer option.
How to Qualify for a 7/6 ARM
Lenders have specific eligibility criteria for ARM loans. Here’s what you typically need:
- Credit Score: Minimum 620 (some lenders require higher)
- Debt-to-Income (DTI) Ratio: No more than 50%
- Loan-to-Value (LTV) Ratio: Up to 95%
- Stable Income: Proof of income through tax returns, W-2s, or bank statements
Each lender sets its own standards, so shopping around is key.
Who Should Consider a 7/6 ARM?
A 7/6 ARM might be a great option if:
- You plan to move or refinance within the first 7 years
- You want lower monthly payments upfront
- You expect your income to increase in the future, making higher payments more manageable
- You’re comfortable with potential rate fluctuations after the fixed period
Final Thoughts: Is a 7/6 ARM Right for You?
If you’re confident in your ability to refinance or sell before the rate adjustments begin, a 7/6 ARM can save you thousands in interest. However, if you prefer long-term stability and predictability, a fixed-rate mortgage might be a better fit.
Next Steps
Curious if a 7/6 ARM is the right choice for you? Talk to a mortgage professional today! 📞 Apply now or speak with an expert to explore your mortgage options!
