7/1 ARM Mortgage Rates

7/1 Adjustable-Rate Mortgage Rates

A 7/1 adjustable-rate mortgage (ARM) can be beneficial to someone who’d like a low interest rate and cheaper initial mortgage payments. The initial interest rate, which in this case is seven years, is generally lower than that of a fixed-rate mortgage. ARMs usually appeal to homebuyers planning on selling the property within a few years of purchase.

A financial advisor can help you create a financial plan to reach your mortgage goals and needs. Financial advisors can also help with investing and financial plans, including tax, retirement and estate planning, to make sure you are preparing for the future.

Historical 7/1 ARM Rates

Adjustable-rate mortgage products have only been around since the 1980s. As of 2019, 7/1 ARM mortgage rates were around 3.78%, on average. On the contrary, the average mortgage rate for 7/1 ARMs was around 3% in 2015 and 2016. Since then, Zillow reported that rates for 7/1 ARMs averaged 5.70% at the end of January in 2023.

*Note: These annual average mortgage rates were calculated using daily average mortgage rates reported by Zillow in 2019. No new public data has been reported since then.

Following the initial seven-year period of fixed interest rates, 7/1 ARM interest rates adjust and become fully indexed interest rates. Fully indexed rates for 7/1 ARMs depend on a margin (this stays the same during the entire loan term) and an index such as the 1-year London Interbank Offered Rates (LIBOR) Index. For example, if you have a margin of 2% and the index has an interest rate of 5.70%, the interest rate for your 7/1 ARM would be 7.70%. There are usually maximum rates specified in your mortgage contract so you know how high your interest rate could go during the life of your loan.

How 7/1 ARM Rates Stack Up Against Other Mortgage Rates

Homebuyers who take on 7/1 ARMs usually have mortgages with 30-year terms. But many of them pay off their mortgages (or refinance) before the initial seven-year period comes to an end.

Compared to the standard 30-year and 15-year fixed-rate mortgages, 7/1 ARMs traditionally have lower interest rates, at least within the first seven months of the loan term. That low initial interest rate can make the 7/1 ARM an affordable mortgage option for homebuyers. But it’s important to make sure the maximum interest rate outlined in your mortgage contract will also fit into your budget, in case it ever raised to that point after the initial seven-year fixed term.

Borrowers with 7/1 ARM mortgages also have an advantage over those with 5/1 ARMs or 3/1 ARMs. After all, their mortgage rates are fixed for a longer period of time. That’s why homebuyers tend to look at 7/1 ARM mortgage rates during periods when interest rates are high.

After 84 months pass, borrowers with 7/1 ARMs will likely find themselves with a higher interest rate. If your interest rate ends up impacting your mortgage payments to the point where it’s too expensive for your budget, you may have to consider refinancing. Another option is selling your home. The last thing you’d want to happen is defaulting on your home loan as that will severely impact your credit. Therefore, if you’re planning on using a 7/1 ARM, it’s essential to know your finances.

Let’s look at an example to see potential mortgage payments compared between a 7/1 ARM with a 30-year term and a 30-year fixed-rate mortgage. For this example, let’s say you’re buying a $175,000 home with a standard 20% down payment of $35,000. Using a mortgage calculator and an estimate of a 7/1 ARM starting at the January 2023 average of 5.70%, your principal and interest payment will be roughly $813. A 30-year fixed-rate mortgage at 5.34%, which was the average rate for this type of loan in 2022, would cost you roughly $781 per month.

This difference isn’t huge with this example because the mortgage rates only differ by 0.36%, but it can be more dramatic depending on what interest rates are offered. However, unless you’re planning on selling the home within those first seven years, you’d most likely benefit more from a fixed-rate mortgage.

7/1 ARM Rate Caps

In many cases, 7/1 ARM rates have caps. There could be a cap that limits how high an interest rate can go within a specific period of time. There might also be a cap that limits how high an interest rate can go over a loan’s lifetime. Some interest rates can increase by a few percentage points following the end of the initial seven-year period.

If your 7/1 ARM comes with a cap, it’s important to understand that your mortgage payment amount could change on a monthly basis. As a result of these interest rate shifts, it can be difficult to know how much money to set aside for mortgage payments following the 7-year period of fixed mortgage rates.

7/1 ARM Quotes

By looking at mortgage rate quotes, you can get a sense of what a mortgage might cost you before you begin the application process. The 7/1 ARM rates you’re offered will depend on the personal information that you enter, including your down payment, your credit score, your zip code and the home purchase price you’re most comfortable with.

Your 7/1 ARM rate will likely not only give you an estimate of what your monthly mortgage payment might be, but it’ll probably also show you what you’ll owe in terms of fees like loan origination fees. Many websites provide homebuyers with mortgage rates that they can view free of charge. The table above is one of those. Seeing how different rates compare to each other is a good idea if you want the best deal on your 7/1 adjustable-rate mortgage.

Factors to Consider When Comparing 7/1 ARM Rates

As you’re shopping around and taking a look at 7/1 ARM mortgage rates, there are several things that you’ll need to keep in mind. Since mortgage rates are tied to an index, they’ll increase as the interest rates in the index go up after the conclusion of your initial 84-month period. If you're not sure whether your salary will increase within the next seven years or whether it’ll be high enough to cover the cost of a more expensive mortgage bill, you might need to look into mortgage products with permanently fixed interest rates.

It’s important to find out how often your mortgage rate will change and whether there are any prepayment penalties charged if borrowers pay off their mortgages early. You’ll also need to know whether there’s a rate cap.

If you want the lowest possible rate on your 7/1 ARM, it helps to have a good credit score, a stable source of income, cash savings and a low debt-to-income ratio (DTI). Lender requirements can vary, so you’ll need to check with a specific lender to find out whether there’s a minimum credit score you need to have. As a general rule, it’s best to keep your debt-to-income ratio below 36% if you’re going to be applying for a mortgage.

If all else fails, you could try convincing your lender to lower your mortgage rate by offering to make a larger down payment or paying for mortgage points. One point can reduce your mortgage rate by up to 0.25%.

Taxes and 7/1 ARMs

If you qualify for the mortgage interest deduction, it’s a great tax benefit. Of course, if you’re not paying a lot of interest because you’re already working with a relatively low mortgage rate for your 7/1 ARM, your deduction won’t be as high as it would be if you had a 30-year or 15-year fixed rate home loan. Uncle Sam gives homeowners permission to deduct interest on mortgage loan amounts that are up to $750,000 when they decide to itemize their deductions.

As a homebuyer you’ll need to be prepared to pay for property taxes as well as a real estate title transfer tax, depending on where you live. And don’t forget that if you sell your house, you might end up with a bigger tax bill once you stop receiving that mortgage interest deduction.

Refinancing Your 7/1 ARM

If you’re getting a 7/1 Hybrid ARM with the intention of refinancing your loan at some point, it can be a good idea to refinance before the seven-year fixed-rate period is over. That way, you’ll be able to take advantage of having low interest rates before getting another mortgage loan.

Even if you’re not considering a refinance, it could be a good move if you don’t want to get stuck with a higher interest rate and a bigger mortgage payment starting with the 85th month of your loan term. But you’ll have to fill out paperwork, likely pay fees and submit to a credit check in order to qualify for a refinance.

If you have a 30-year fixed rate mortgage or a 15-year fixed rate mortgage, you could refinance and get a 7/1 ARM. That could work well if you plan on selling your house within the next seven years. Your interest rate will be lower and then you can use whatever money you’ve saved for other purposes, like paying off debt or padding your emergency fund.