A 7/1 ARM (“adjustable rate mortgage”) is amortgage that has a fixed interest rate in the beginning, then switches to an adjustable rate after. The 7 in 7/1 indicates the initial fixed period of seven years. After that, the interest rate adjusts once yearly based on the index stated in the loan agreement, plus a margin set by the lender.
A 5/1 ARM has a fixed interest rate for the first 5 years.
You might also see something like a 7/6 ARM, which adjusts every 6 months after the initial period.
What are the main PROS of ARMs?
The main benefit of a 7/1 or 5/1 ARM is a lower interest rate during the initial fixed period than a traditional 30-year fixed mortgage.
An ARM can be a good idea if it is likely you’re going to sell the house (or refinance) before the fixed-rate period is up.
What are the main CONS of ARMs?
The biggest drawback of an ARM, in our opinion, is all the uncertainty that comes with it. Rates could increase after the initial fixed period is up. Moreover, you might find you’re unable to sell or refinance when you want to, leaving you stuck with a higher mortgage payment.
Is an ARM right for you?
Whether an ARM is right for you depends on your goals and comfort level with unpredictability. If you sell the home or pay off the mortgage before the adjustable rate goes up, you'll save money.
But an ARM probably isn't the right option if you plan to settle in for many years and want the certainty of a constant mortgage rate and monthly payment.