Profile picture for Lori Crow

What does 5/1 & 7/1 ARM mean?

  • September 22 2013 - US
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Answers (4)

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Profile picture for larryeul
Hello-

  A 5/1 ARM (Adjustable Rate Mortgage) usually means you have a fixed interest rate for 5 years, and then your mortgage interest can adjust every year after the initial 5 years.

  A 7/1 ARM is the same idea, 7 years on the set/fixed rate, and then the adjustable rate every year after...

  Compare the 5/1, 7/1 and a 30 year fixed rate mortgage. The 'sell' on the adjustable loans is the average homeowner keeps a mortgage for 5-7 years, so why not take the lower interest rate offered, and you will probably be out of the mortgage by the time the rate starts adjusting= meaning going up.

  I strongly recommend a 30 year fixed rate. You probably wont keep it that long, but you wont be priced out of your property by increasing interest rates/mortgage payments.

  Best to you.
  • September 22 2013
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ARM is an Adjustable rate mortgage.  The # in the beginning #/1 is the number of years your rate is fixed - after that, the ARM part kicks in and it will vary.  The # at the end is the period of adjustment - your rates can (will) change every year.

Like many others, I strongly advise a fixed rate mortgage at 15 years.  If that's a stretch, 30 years.  Nothing else should be considered except in VERY nuanced situations and only after an extensive amount of math and homework has been done.

As Larry Eul above me noted, the sell here is if you KNOW you're only going to be in the property for X amount of years (less than 7 or 5).  To be honest, with the way the market and economy can shift, assuming you'll be able to sell your home in almost any demographic 5-7 years from now is risky at best, and foolish at worst.

Good luck
  • September 22 2013
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Lori - you need to work the numbers to see what may work better for you.

I recently advised my son and daughter-in-law to go with a 7 yr ARM - they are buying a town home with the intention of moving within that 7 yr period to a single family home.

They will be saving close to $21,000 over the 7 years due to the much lower interest rate.

Even if they remain past the 7 yr mark, for another year or 2, and rates go up - they will still come out ahead.

In case you didn't know, and since this wasn't mentioned below, the adjustable rate loans have built -in caps......my son's  rate cannot go up more than 2% in the first adjustment period (year 8)....nor can it increase more than 2% in any adjustment period.

Most importantly,  the max it can go up  is capped at 5%.

They are starting out with a rate of 3.2% - worst case scenario, they will wind up paying 8.2% in year 10 if they remain in the home.

If they decide to stay indefinitely, they always have the option of refinancing to a 30 year fixed rate loan.
  • September 22 2013
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Profile picture for Lori Crow
Thank you so much for the answer & for the sage advice - makes sense.
  • September 22 2013
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