![]() Knowing what type of mortgage you're getting can be a challenge, since so many things that sound like a good idea are often the things that can cost you the most money. Ability to refinance into a fixed-rate mortgage if you are unlikely to move anytime soon.Ability to qualify for a larger mortgage, based on the initial interest rate.Lower monthly payment for the first seven years of the loan.What Are The Benefits of a 7-Year Mortgage? The index does affect the teaser rate offered. With a 7/1 loan, though the index used should be factored in, other factors should hold more weight in the decision of which product to choose. But due to the long initial period of a 7/1 ARM, this is less important than it would be with a 1 year ARM, since no one can accurately predict where interest rates will be seven years from now. During periods of declining rates you're better off with a mortgage tied to a leading index. A loan tied to a lagging index, such as COFI, is more desirable when rates are rising, since the index rate will lag behind other indicators. One of the things to assess when looking at adjustable rate mortgages is whether we're likely to be in a rising rate market or a declining rate market. In truth, there are no good or bad indexes, and when compared at macro levels, there aren't huge differences. In analyzing different 7-year mortgages, you might wonder which index is better. It's important to know whether the loans you are considering have a higher initial adjustment cap. Some seven year loans have a higher initial adjustment cap, allowing the lender to raise the rate more for the first adjustment than at subsequent adjustments. Payment rate caps on 7/1 ARM mortgages are usually to a maximum of a 2% interest rate increase at time of adjustment, and to a maximum of 5% interest rate increase over the initial indexed rate over the life of the loan, though there are some 7-year mortgages which vary from this standard. It's important to know how the loan is structured, and how it's amortized during the initial 7-year period & beyond. Though you pay that initial indexed rate for the first five years of the life of the loan, the actual indexed rate of the loan can vary. Subsequent payments at time of adjustment will be based on the indexed rate at time of adjustment plus the fixed percentage amount, same as it was calculated for the initial indexed rate, but within whatever payment rate caps are specified by the loan terms. This amount added to the index is called the margin. The initial rate, called the initial indexed rate, is a fixed percentage amount above the index the loan is based upon at time of origination. The FHFA also publishes a Monthly Interest Rate Survey ( MIRS) which is used as an index by many lenders to reset interest rates. London Inter Bank Offering Rates (LIBOR).11th District Cost of Funds Index (COFI).Constant Maturity Treasury (CMT or TCM). ![]() These are the most common indices that banks use for mortgage indices: ![]() Currently rates are low, in-part because the recovery from the recession has been slow & the Federal Reserve has bought treasuries & mortgage backed securities in order to take bad assets off bank balance sheets & drive down interest rates.ħ-year ARMs are most often tied to the 1 year Treasury or the LIBOR (London Inter Bank Rate) but it's possible that any particular ARM could be tied to a different index. When Are Rates The Best?ħ-year ARMs, like 3 and 5-year ARMs, are based on various indices, so when the general trend is for upward rates, the teaser rates on adjustable rate mortgages will also rise. A 7-year could be a good choice for those buying a starter home who want to increase their buying power and are planning to trade up in a few years, but who wish to avoid a lot of volatility in their payment levels. 7/1 ARM loans often trade around or slightly above the rate on the 15-year home loan. Teaser rates on a 7 year mortgage are higher than rates on 1 or 3 year ARMs, but they're generally lower than rates on a 10 year ARM or a 30-year fixed rate mortgage. It is common for balloon loans to be rolled over when the term expires through lender refinancing. There are also 7-year balloon mortgages, which require a full principle payment at the end of 7 years, but generally are not offered by commercial lenders in the current residential housing market. A seven year mortgage, sometimes called a 7/1 ARM, is designed to give you the stability of fixed payments during the first 7 years of the loan, but also allows you to qualify at and pay at a lower rate of interest for the first five years. ![]()
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