7/6 ARM: 7/6 Adjustable Rate Mortgage in Home Loans
7/6 Adjustable Rate Mortgages
What is a 7/6 ARM?
A 7/6 ARM is a hybrid adjustable-rate mortgage with a fixed-rate period of seven years. Unlike its cousin, the 7/1 ARM (which has one-year adjustment periods), the interest rates on a 7/6 ARM can be adjusted once every 6 months during the variable-interest part of the loan.
Benefits and Risks of a 7/6 ARM
What are the benefits of a 7/6 ARM?
Well, since a 7/6 ARM has six-month adjustment periods, that means it will usually be offered at a lower initial interest rate than a similar loan, like a 7/1 ARM-- and that might be able to save you a ton of money upfront.
What are the risks of a 7/6 ARM?
Like with other hybrid ARMs, the main risk of a 7/6 ARM is that interest rates could increase dramatically during the variable interest rate portion of the loan -- making it difficult for you to afford your monthly payments. Since your interest rate on the loan will be adjusted every six months, you’re really at the mercy of market forces when it comes to the size of your mortgage payment (and that’s not a great place to be).
For that reason, it’s suggested that people who buy a home with a 7/6 ARM be ready and willing to sell or refinance their home before the end of the fixed-rate period of their loan. That way, they’ll never have to experience the roller coaster ride of constantly changing interest rates.
How Much (and How Fast) Can My 7/6 ARM Increase?
All adjustable-rate mortgages have lifetime caps, which limit, or “cap” the maximum amount of interest that can be charged on the loan. These limits are expressed as a percentage increase from the initial, fixed-interest rate. For example, if your 7/6 ARM had a lifetime cap of 4%, and it started at 3%, your interest rate would never go beyond 7% -- regardless of what happened in the market.
ARMs also have periodic caps, which restrict the amount that the interest rate can change during any one adjustment period. So, for example, if your 7/6 ARM had a periodic cap of 0.75%, your interest rate could never increase more than 0.75% in any one 6 month period, even if interest rates increased 2% or 3% during that period.
How 7/6 ARM Variable Interest Rates Are Calculated
Just like other ARMs, 7/6 ARM variable interest rates are always based on an index, often the LIBOR (London Interbank Offered Rate) index, the CMT (Constant Maturity Treasury) index, or the prime rate. Basically, what most of these indexes do is measure the rates at which banks lend money to each other -- which gives them an idea of how much they should charge you for a mortgage.
In addition to the index rate, lenders charge you a margin. This is an additional amount, also expressed as percentage, that contributes to the lender’s profit and can be adjusted based on the risk you pose as a borrower. Plus, there can be other charges -- which is why you should always look at the APR (annual percentage rate) of an ARM, not just the interest rate.