When the mortgage interest rate environment is high, an Adjustable-Rate Mortgage, or ARM, can be a great option for many homebuyers.
Unlike a Fixed-Rate Mortgage where the interest rate stays the same for the entire duration of the loan’s term, an ARM typically starts with a lower introductory fixed interest rate and then adjusts to a market rate at regular intervals afterward. With a 7/6 ARM, the initial lower, fixed-rate period is for a full 7 years. (That’s what the “7” refers to.) Once the initial 7-year period is over, the loan will switch over to an adjustable rate which can change every 6 months. (That’s what the “6” refers to.)
Because 7/6 ARMs offer customers a below-market rate for the first 7 years of their mortgage, this loan type is a great option for homebuyers seeking a lower interest rate and maximum imminent savings on their monthly mortgage payment when compared to a traditional fixed-rate mortgage.
Plus, although interest rates can adjust and potentially go up (or down!) after the 7-year introductory period is up, there are built-in limits for how much those rates can rise or fall. These are referred to as rate caps.
- Initial rate cap: This limits how much your interest rate can increase the very first time it adjusts after the initial 7-year fixed period ends. For example, if your initial rate cap is set at 5.00%, that’s the most your rate could rise or fall during the first adjustment period.
- Adjustment rate cap: This limits how much your interest rate can subsequently change after the initial rate adjustment. For example, if your adjustment rate cap is set at 1.00%, that’s the most your rate could rise or fall after the first adjustment period.
- Lifetime rate cap: This is the maximum amount your interest rate can ever increase over the life of your loan. For example, if your lifetime rate cap is set at 5.00% and your initial fixed rate was 6,00%, your rate will never adjust to be lower than 1.00% or higher than 11.00%.
Other Benefits of a 7/6 ARM:
- Take your money further: Because your qualification for a 7/6 ARM is based on the introductory rate, you may be able to stretch your purchasing power by qualifying for a home with a larger sales price or shrink your spending by optimizing cost savings—which can free up funds for other things like furniture for your new home or putting toward your rainy-day fund.
- Short-term solution: If you’re knowingly going to sell your home within 7 years—before the initial fixed-rate period of your 7/6 ARM ends—you can benefit from a lower interest rate without facing the fear of future rate increases by avoiding the adjustment rate period altogether.
- Opportunity to refinance: If at the end of your 7-year low introductory rate period you decide to refinance, you may be able to lock in a stable fixed rate which can protect you from future rate hikes. Plus, if your credit score has improved or market rates have dropped, you may be able to qualify for a better rate or more favorable loan terms by refinancing.
If you want to learn more or discover if a 7/6 ARM may be the right financing solution for you, contact your Pulte Mortgage Financing Advisor today. We’re here to help!
