There are several basic components of a 7/6 ARM that borrowers need to be aware of when assessing their loan options. Since the initial interest rate is only fixed for 7 years, the future rates and payments can vary dramatically after the rate adjustment, depending on the ARM and the current market. Even if rates are stable, your monthly payments may change significantly throughout the loan term. Several factors impact 7/6 ARM rates, including the index it's attached to, the margin, interest rate floors and caps, as well as intervals.Rates
Adjustment Interval
In general, the interest rate and monthly payment of an ARM may change every month, quarter, year, 3 years or 5 years. The duration between the change in rate is called the adjustment period or interval.
For a 7/6 ARM, the introductory period is 7 years, and then once that expires, the interest rate can adjust every 6 months. Keep in mind, not all ARM loans may adjust downward even if market movement would indicate it should do so. That’s why you should make sure to read the fine print of your mortgage agreement before moving forward.
Our loans adjust up or down based on market conditions subject to limitations that we’ll get into below.
The Index
Lenders may base ARM rates on various financial market indexes. Some of the most common indexes used for ARMs are Treasury (CMT) securities, the Cost of Funds Index (COFI) and the Secured Overnight Financing Rate (SOFR).
The Margin
To determine an interest rate on an ARM, a base percentage is added to the index rate to cover the cost of lending the money. This addition is known as the margin.
Lenders may determine a borrower’s margin based on a flat percentage or by assessing their credit score. Under this model, the better your credit score, the lower the margin you’ll qualify for. Your rate will never be lower than the margin. When considering an ARM, make sure to review the index and margin.
Interest Rate Caps And Floors
Interest rate caps put a limit on how much the interest rate can increase. Usually, these come with a corresponding floor that limits how much your payment can move downward as well. These caps and floors come in three versions: initial, periodic adjustment caps and lifetime caps.
With an initial adjustment cap and floor, a limit is placed on the amount a rate can increase or decrease at the initial adjustment. There are also limits to how much your rate can go up or down with each subsequent adjustment. Finally, there is a limit placed on the amount a rate can increase or decrease throughout the loan term with a lifetime cap. Most ARM loans must have a lifetime limit by law.
When ARMs are advertised, you’ll see products advertised like this: 7/6 ARM 5/1/5. The first number refers to how long the rate stays fixed at the beginning of the loan, in this case 7 years. The second number is how often the rate adjusts after the fixed period – every 6 months.
The last three numbers listed are the caps and floors. In this case, your rate won’t go up or down more than 5% on the initial adjustment. The rate can’t increase or decrease more than 1% with each adjustment after the first. Finally, your rate won’t rise or fall more than 5% over the life of the loan. Make sure you know all of your interest and payment caps when considering an ARM.
