The 7/6 ARM is becoming increasingly popular since rates have ticked up. Here are some basics you should know before signing off in a 7/6 ARM.
1. The Adjustable Rate Change After Fixed Period
Since the initial interest rate is only fixed for 7 years, the future rates and payments can adjust dramatically after the rates fixed period is over.
2. The Adjustment Intervals
For a 7/6 ARM, the fixed period is 7 years, and then once that expires, the interest rate can adjust every 6 months.
3. 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).
4. 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.
5. Interest Rate Caps And Floors
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.
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