7/6 ARM: Definition and how it works

When you apply for a mortgage, you need to choose the type of loan that works for you, its term, and make some other key decisions. You may see banks offer quotes for things such as a 30-year fixed mortgage, a 15-year fixed mortgage, or a 7/6 ARM.

A 7/6 ARM is a type of adjustable-rate mortgage. These loans have interest rates that may change over time but can be a good fit for certain borrowers. We’ll break down what you need to know and help you decide if a 7/6 ARM is right for you.

What is a 7/6 ARM?

An adjustable-rate mortgage (ARM) is a mortgage that has an interest rate that can change over time. A 7/6 ARM means that the loan has an interest rate that is fixed for the first seven years of the loan. After that, it adjusts every six months.

When the interest rate of your loan changes, your monthly payment will also change, so your ARM could get more or less affordable over time.

How to read ARM loan advertisements

ARMs are usually quoted using two numbers, such as 7/6. The first number is the number of years that the interest rate is fixed. The second number is how frequently the rate changes after the fixed-rate period ends.

For example, a 5/1 ARM has a fixed rate for five years, and then the rate adjusts annually. A 7/6 ARM has a fixed rate for seven years, and then the rate adjusts every six months.

7/6 ARM loan basics

When you apply for an ARM, it’s important to understand how your loan will work and what influences the interest rate on your loan.

Interest rates

As with any loan, it’s important to understand the interest rate of your mortgage. This determines how much interest you pay each month and the overall cost of your loan. The lower the rate, the less you have to pay.

Your ARM’s rate will depend on many factors, including:

• The financial market index to which the mortgage is attached
• The margins of that index
• Current interest rate floors
• How often interest rates and payment amounts change (or intervals)
• Caps on interest rates

Adjustment interval

When you apply for an ARM, pay close attention to both how long the loan’s rate remains fixed as well as the adjustment interval once that period ends. For a 7/6 ARM, the interval is six months, meaning the rate can change every six months.

Make sure to read the fine print about how adjustments work. You may find that your loan’s rate rises more than expected or does not fall when market rates do. Rocket Mortgage’s 7/6 ARMs adjust both up and down based on market conditions, subject to some limits that we’ll cover.

Interest rate caps

Your ARM may come with an interest rate cap. This can impact the rate at which your loan’s interest rate can adjust and limit how high it can rise.

For example, you may get a 7/6 ARM with an initial rate of 5%, an adjustment cap of 2%, and an interest rate cap of 11%. That means that when your loan’s rate adjusts, it will not move by more than 2% in a single adjustment. It also limits your loan’s rate from ever going above 11%, placing a cap on the cost of your loan.

Interest rate floors

An interest rate floor is like a rate cap, but it limits how low your rate can adjust. For example, if you get the loan mentioned above with an initial rate of 5% and a cap of 11%, the floor might be 4%. Even if market conditions dictate the rate should be lower, the loan’s rate will never fall under 4%, limiting how far your loan’s rate and monthly payment could fall.

The index

The index of your ARM is the rate used to determine your ARM’s interest rate. Usually, these are important benchmark rates such as the Constant Maturity Treasury (CMT) rate, Cost of Funds Index (COFI), and the Secured Overnight Financing Rate (SOFR).

The margin

The margin of your ARM is an amount added to the index rate of your loan to determine your ARM’s interest rate. For example, your loan’s rate could be equal to CMT + 2%. In this case, 2% is the loan’s margin. It covers the cost of lending money for the lender.

Pros and cons of 7/6 ARM

If you’re considering applying for a 7/6 ARM, keep these pros and cons in mind.

Pros

7/6 ARMs can be a good fit for some people. These are some of the benefits of using a 7/6 ARM to buy a home.

• Lower payments during the fixed-rate period. ARMs typically have lower initial rates than fixed-rate mortgages, so you’ll have a lower monthly payment during the loan’s early years.
• Flexibility for short-term homeowners. If you plan to move out of the home relatively quickly after buying it, you can secure a lower rate without having to worry about future adjustments.
• Interest rate caps. While rate adjustments can leave you with some uncertainty, interest rate caps place a maximum limit on how much your payment can rise.
• Potential for rate decreases. In some cases, your rate may fall, though it can be unlikely due to the fact that interest rate floors are often set at, or even above, the loan’s initial rate.

Cons

7/6 ARMs aren’t for everyone. Before applying, consider these cons.

• Unpredictability. Once the interest rate of an ARM begins to adjust, you can face a lot of unpredictability. Your monthly payment can rise quickly and become unaffordable.
• Prepayment penalty. If you plan to pay your loan off ahead of schedule to avoid rate adjustments, you may have to pay a fee for early repayment. Be sure to check with your lender to see if this fee applies.
• Complexity compared to fixed-rate loans. Fixed-rate loans are far simpler than ARMs, which have more moving parts. You need to read the terms of your ARM carefully to make sure you understand them.
• Shorter fixed-rate period. With an ARM, your interest rate is only set for a short period of time. Fixed-rate loans let you keep the same rate for 15 or 30 years.
• Limits on interest rate decreases. Many ARMs will limit how far the interest rate of your loan can fall.
• Risk for long-term homeowners. If you keep your home for the long term, you might find that your ARM rate rises, making your monthly payments difficult to afford, which could place you at risk of foreclosure.

When to consider a 7/6 ARM

There are a few scenarios where you should consider applying for a 7/6 ARM.

• You have short-term homeownership plans. Homeownership is usually a long-term commitment, but sometimes it makes sense to buy a home you plan to move out of in a few years. If you plan to move before the interest rate starts to adjust, a 7/6 ARM or 5/1 ARM can land you a better rate than a fixed-rate loan.
• You want to refinance.¹ If you plan to refinance in a few years when your income or credit improves and makes you a more appealing borrower, an ARM can be a good way to get a slightly lower rate to start with. You can refinance to a fixed-rate loan before rate adjustments begin.
• You’re trying to time the market. While it’s hard to do and we don’t usually recommend doing so, you may consider applying for an ARM if you want to time the rate market. If rates drop later on, you can take advantage of a lower mortgage rate through the ARM, then lock in a low rate by refinancing to a fixed-rate loan.
• You think you’ll earn more money later in your career (and you already plan to refinance). If you expect your earnings to rise, you may consider an ARM, which has an affordable payment today with the understanding that if rates rise, your higher income in the future will let you handle the higher payments.

To get a better understanding of how rate adjustments could impact your payment, which can help you decide if an ARM is right for you, you can use Rocket Mortgage’s mortgage calculator.

How to qualify for a 7/6 ARM

As with any mortgage, you’ll need to show your lender that you’re a trustworthy borrower to qualify for an ARM. You may need to meet stricter requirements for an ARM than a fixed-rate loan because of their unpredictability.

Typical requirements to qualify include:

• Credit score: A minimum credit score of 620.
• Debt-to-income (DTI) ratio: Your DTI, which measures your monthly debt against your income, should be no more than 50%.
• Loan-to-value (LTV) ratio: An LTV ratio measures the appraised value of the home relative to the requested loan amount. For a 7/6 ARM, this can be as high as 95%.
• Verifiable income or proof of alternative funds: You will need to demonstrate that you have the funds to make consistent payments.

FAQ

Before applying for a 7/6 ARM, keep these frequently asked questions in mind.

Can a 7/6 ARM be refinanced?

Yes, you can refinance a 7/6 ARM by applying for a refinancing loan and paying off the old loan’s balance. Keep in mind that there are costs associated with refinancing that can often run into the thousands of dollars.

Is a 7-year ARM still a 30-year mortgage?

Yes, a 7/6 ARM is still a 30-year mortgage, but the rate of the loan will begin to change after seven years have passed. If you want a rate that will not change for the life of the loan, consider applying for a 30-year fixed-rate mortgage.

How is the interest rate on a 7/6 ARM determined?

The interest rate of an adjustable-rate mortgage will depend on many factors, including market conditions, your financial situation, and your credit score.

Is it ever a good idea to get an adjustable-rate mortgage?

Yes, an adjustable-rate mortgage can be a good idea in some cases due to its lower initial interest rates when compared to fixed-rate loans. For example, if you plan to move or refinance before the rate begins to adjust, they offer significant upside while letting you avoid the risk of rate adjustments.

The bottom line: Should you get a 7/6 ARM?

An adjustable-rate mortgage can be a good fit for people who want to get a mortgage with a lower rate for a short period of time. Whether you plan to move out, pay off the loan, or refinance quickly, getting a lower rate through an ARM loan can be a good way to save money. If you plan to keep your home and mortgage for the long run, consider a less risky fixed-rate loan instead.

If you’re ready to buy a home and want to see your rates for a 7/6 ARM or another type of loan, you can begin an application with Rocket Mortgage today.

¹ Refinancing may increase finance charges over the life of the loan.