7 Year ARM
A 7 year ARM is a type of adjustable rate mortgage. This means that at some point in the period of the loan the interest charged will become adjustable (or variable). Your rate will be linked to one of the indexes such as the 12 Month T-Bill or perhaps COFI. However, for the first 7 years of the loan the interest charged (and therefore the monthly payments made) will be fixed.
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The advantages of a 7 year ARM are twofold:
* In the early period of the mortgage, when money is tight (you’ve just paid to move in, decorate and furnish the house, after all) you know exactly how much you need to pay each month. This helps you to plan and budget the household expenditure.
* Your interest rate during those first 7 years may be considerably lower than you could expect from a fixed rate mortgage. This teaser rate is intended to attract buyers who want to maximize the amount of house they can afford.
In the later years - after that seven year fixing - the interest charged (and thus the monthly payments) will vary in a 7 year ARM. The point here is that you are taking some of the risk of interest rates rising in the future (and you’ll benefit if they fall) instead of the lender assuming that risk.
As ever in financial markets, when there is a transfer of risk there is a change in prices. That change comes through as a lower interest rate premium charged over the period of the loan. So a 7 year ARM will give you lower rates in the early years in exchange for taking some risk you that the rate will rise in the future. This increases your buying power by making housing more affordable: you can buy more house for your income, something very important in hot markets like California.
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Rates as of Sunday, October 12, 2008
| Institution | Rate % | APR |
|---|---|---|
 |
5.875 | 5.911 |
 |
5.875 | 6.033 |
 |
5.875 | 6.051 |