Mortgage rates in Michigan
Quick insights
- A 7/6 adjustable-rate mortgage often includes an introductory rate for the first seven years.
- The interest rate and monthly payment can change every six months after the introductory period.ec-arm-hud-may05
- For homeowners planning to move or pay off the house before the seven-year mark, a 7/6 ARM could make sense.
A 7/6 adjustable-rate mortgage (ARM) offers homeowners an opportunity to receive a set interest rate for an introductory period of seven years. After the introductory period, the interest rate adjusts every six months for the remaining loan term.
This guide dives into the details of 7/6 ARMs.
What is a 7/6 ARM?
A 7/6 ARM adjustable-rate mortgage involves an introductory period of seven years, in which the interest rate doesn’t change. Typically, lenders offer a comparatively attractive interest rate during this period.ec-arm-hud-may05 After seven years, the interest rate can change every six months, resulting in a fluctuating monthly payment for the remainder of the 30-year loan term.
How does a 7/6 adjustable-rate mortgage work?
Unlike a fixed-rate mortgage, which comes with an interest rate, loan term and consistent monthly payment, ARMs come with a bit more complexity.
Explore the components of a 7/6 ARM below.
Interest rates
Initially, a 7/6 ARM’s interest rate remains fixed for seven years. After that seven-year threshold, the interest rate attached to the loan can vary over time.
Typically, the variable interest rate is attached to an interest rate index. As the interest rate index rises and falls due to market conditions, the variable interest rate attached to the mortgage can change, too.ec-consmr_fin_arm_apr24
In addition to the index, lenders include a margin in the interest rate valuations. The margin is added to the interest rate index. The interest rate cannot fall below the margin.ec-consmr_fin_arm_apr24
Adjustment interval
The interest rate attached to your ARM won’t change without warning. Instead, changes to your interest rate are made on a fixed schedule. For a 7/6 ARM, the variable interest rate can adjust every six months.
Caps and floors
A potential rise in rates represents an obvious downside to ARMs, but lenders often include interest rate caps. For loans that include an interest rate cap, the variable rate can never rise above the cap. Additionally, the caps put guardrails on how much the rate can rise within a single adjustment. On the other end of the spectrum, lenders may include interest rate floors, which limit how far your interest rate can fall.
For example, let’s say your 7/6 ARM comes with a 2-2-5 structure. This means after the initial seven-year period, the interest rate can never rise or fall more than 2% during an adjustment, including the first and subsequent adjustment. And during the entire loan term, the interest rate will not rise or fall by more than 5%.
7/6 ARM example
Let’s explore a 7/6 adjustable-rate mortgage with a 5% initial interest rate. With a 7/6 ARM, the interest rate will adjust every six months following the initial adjustment.
If this loan has a 2-2-5 rate cap structure, which involves an initial, subsequent and lifetime cap, here’s how the interest rate might change over time:
After seven years, the initial rate adjustment might rise or fall by 2%. In this case, it could rise to 7%, fall to 3% or land somewhere in between. From there, the interest rate can change every six months. During each adjustment, the interest rate could rise or fall by up to 2%. But since this loan includes a 5% rate cap, the maximum interest rate is 10%.
Can you refinance a 7/6 ARM?
Like any mortgage product, eligible borrowers can choose to refinance a 7/6 ARM. Depending on the situation, you might refinancerefinance-hl000061 into a fixed-rate loan or another variable-rate loan. While refinancing may be possible for some, it’s not always an option. If the home loses value, or your financial situation changes for the worse, refinancing might be out of the question.
Pros and cons of 7/6 ARM
Before jumping into a 7/6 ARM, consider the potential advantages and disadvantages of this type of loan.
Pros
- Introductory rate: Generally, borrowers can receive an interest rate during the introductory period that affects how affordable a home purchase is.
- Relatively long introductory period: Seven years of an introductory rate may give homeowners time to navigate their budget or potentially move before higher interest rates become a possibility.
- Interest rates might fall: Depending on the various economic factors, borrowers might enjoy lower interest rates during the adjustable-rate period of the ARM loan term.
Cons
- Potential prepayment penalties: If your lender charges a prepayment penalty, that can take away some of your financial options. Not all lenders charge prepayment penalties.
- Complex loan details: Carefully review the fine print of your mortgage documents to confirm you understand every detail.
- Unpredictable payments: After the introductory period, rising and falling rates can make for unpredictable payments that might be difficult to budget for.
Who is a 7/6 ARM good for?
A 7/6 ARM can suit borrowers who understand and are comfortable with the potential for rising and falling mortgage payments after the introductory period. The 7/6 structure can be a worthwhile option for homeowners planning to move or pay off the house within seven years.
FAQ
Is a 7/6 ARM a good idea?
Whether or not a 7/6 ARM is a good option for your financing needs varies based on your situation. For some homebuyers, this lending solution could make sense.
What happens after an ARM expires?
After the initial interest rate attached to an ARM expires, the interest rate will adjust on a predetermined schedule.
Can I refinance a 7/6 ARM?
In some cases, you can refinance an ARM. But refinancing options vary based on your financial situation, and you’ll typically need to pay closing costs.
In summary
While a 7/6 ARM suits the needs of some homeowners, it’s not the right fit for everyone. Take the time to weigh your options before pursuing a 7/6 adjustable-rate mortgage.
