Everything You Need To Know About 7/1 ARM Jumbo Loans

Getting a jumbo loan can be an excellent way to finance a high-end home. Jumbo loans exceed the conforming loan limits set by Fannie Mae and Freddie Mac, allowing borrowers to get mortgages over $647,200 in most areas. While fixed-rate mortgages are common for jumbo loans, adjustable-rate mortgages (ARMs) can also be a good fit for some buyers. Here’s what you need to know about 7/1 ARM jumbo loans.

What Is A Jumbo Loan?

A jumbo loan is a mortgage that exceeds the conforming loan limits established by Fannie Mae and Freddie Mac. The conforming loan limit in most parts of the U.S. is $647,200 for 2023. Loans above that amount are considered jumbos.

Jumbos come with higher interest rates and stricter eligibility requirements compared to conforming loans. Lenders view them as riskier, so they offset that risk by charging higher rates. Borrowers usually need excellent credit and stable finances to qualify.

Jumbos fall into two categories

• Agency jumbos – These loans are between $647200 and $970800. They meet the underwriting criteria of Fannie Mae and Freddie Mac despite exceeding the conforming loan limit.

• Non-agency jumbos – Also called “non-conforming jumbos,” these loans are above $970,800. They don’t meet agency standards and are considered higher risk.

Benefits Of A 7/1 ARM Jumbo

Adjustable-rate mortgages can make jumbo loans more affordable, at least initially. Here are some potential benefits of a 7/1 ARM jumbo:

• Lower rates – The interest rate on a 7/1 ARM is lower than rates for fixed-rate jumbo loans during the first 7 years. This results in a lower monthly payment.

• Qualify for a larger loan – The lower introductory rate may allow borrowers to qualify for a bigger mortgage than they could with a fixed-rate loan.

• Pay off mortgage quickly – Borrowers can make extra payments during the 7-year fixed period to pay down principal faster when rates are low.

• Plan to move – A 7/1 ARM can work for those who only plan to keep the home for 5-7 years. They can avoid a rate increase.

• Rates may fall at adjustment – If rates are lower when the ARM adjusts, the monthly payment could decrease.

How Do 7/1 ARM Jumbo Loans Work?

A 7/1 adjustable-rate mortgage keeps the same interest rate for the first 7 years of the loan. After 7 years, the rate can change annually based on market conditions.

Here are some key features of 7/1 ARM jumbos:

• Fixed period – The interest rate remains unchanged for the first 7 years after closing.

• Annual adjustments – The rate adjusts every year after the fixed period ends. It’s tied to an index like the SOFR.

• Rate caps – Limits prevent the rate from increasing or decreasing too quickly at adjustment. Common caps are 2/2/5 – rate can’t go up more than 2% the first adjustment, 2% after that, or 5% over the life of the loan.

• Amortization – Jumbo ARMs are typically 30-year loans. Payments after adjustment could exceed the amount needed to pay off the loan in 30 years.

• Prepayment penalty – Lenders may charge a penalty if the loan is refinanced or paid off early. Make sure you know the terms.

7/1 ARM Jumbo Rate Comparison

• As of June 2023, the average 30-year fixed jumbo rate is 5.66% APR.
• The average 7/1 ARM jumbo rate is 5.38% APR.
• Over the 7-year fixed period, the ARM will have lower monthly payments.
• When the ARM adjusts, payments could rise if rates increase. Or fall if rates decrease.
• Compare options to see if the 7/1 ARM savings outweigh the risks.

Jumbo Loan Requirements

Jumbo loans have stricter eligibility standards than conforming loans. Here are typical requirements:

• Credit score – Most lenders want at least a 680 FICO score for agency jumbos, and 700 or higher for non-agency jumbos. Some may go as low as 660.

• Down payment – At least 20% is usually required. For super jumbos above $1 million, the minimum is typically 30% down.

• Income/assets – Lenders want to see you can comfortably afford the payments. Expect to document assets, income, and a down payment from your own funds.

• Low debt-to-income ratio – Your total monthly debt payments, including the mortgage, should not exceed 36% of your gross monthly income.

• Cash reserves – Many lenders require 9-12 months of mortgage payments available in your bank accounts.

• Home appraisal – The home must appraise for at least the loan amount you’re requesting.

7/1 ARM Jumbo Loan Costs

You’ll incur costs to get a jumbo mortgage, just like any home loan. Be prepared for these fees:

Upfront costs

• Application fee – Usually around $500
• Appraisal fee – Typically $400-$800
• Credit report fee – About $50 per person
• Origination fee – Up to 1% of the loan amount
• Title fees – Varies by area, often $1,000-$2,500

Closing costs

• Prepaids – Home insurance premiums, property taxes, and prepaid interest
• Escrow deposit – Two months of property tax and insurance payments
• Recording fees – To file deed with local recorder’s office

Ongoing costs

• Mortgage insurance – Required for loans with less than 20% down
• Homeowners insurance – Varies based on home value and location
• Property taxes – Dependent on local tax rates and home value

Shop around to compare total costs offered by different lenders.

7/1 ARM Jumbo Loan Pros And Cons

A 7/1 ARM jumbo isn’t right for everyone. Consider the advantages and disadvantages when deciding if it’s a good fit:

Pros

• Lower interest rate and payment at first
• Pay off mortgage faster during fixed period
• May qualify for larger loan amount
• Good option if selling in 5-7 years

Cons

• Payment could increase substantially after adjustment
• Hard to budget when future payments uncertain
• Risk being “payment shocked” if rates rise
• Locked in if rates increase and can’t refinance
• More complicated to calculate payoff amounts

As with any major financial decision, weigh the pros and cons carefully in light of your situation. Know the risks and have a backup plan you can live with if rates trend up after the fixed period.

Alternatives To 7/1 ARM Jumbo Loans

Other options besides a 7/1 ARM include:

• 30-year fixed-rate jumbo – Predictable payments but higher rate

• 15-year fixed-rate jumbo – Lower rate than 30-year option but higher monthly payment

• 5/1, 7/1 or 10/1 ARM – Compare different fixed period lengths

• Interest-only jumbo – Pay only interest for set period; payments jump after

• 40-year mortgage – Lower payment than 30-year loan but pay more interest

• Home equity loan/line – Use home equity rather than jumbo refinance

Run the numbers to see which option best fits your budget and goals. Many people feel more comfortable with the predictability of fixed-rate loans. But for some, the lower initial rates of ARMs make sense.

Questions To Ask When Getting A 7/1 ARM Jumbo

If you’re considering a 7/1 ARM jumbo, make sure to ask these questions:

• What index will the interest rate be based on after adjustment?

• What are the annual and lifetime interest rate caps?

• Will my loan have a prepayment penalty? If so, how much?

• What will my payment be after the rate adjusts if rates increase by 2%?

• Is the monthly principal and interest payment fully amortized over 30 years?

• How much cash in reserves do you require, and how is that calculated?

• What credit score is needed for this program?

• Will I incur points or origination fees? How much?

Getting clear answers will help you understand the loan terms and whether this product fits your needs.

The Bottom Line

A 7/1 ARM jumbo mortgage can make sense for some borrowers. It provides lower payments for the first 7 years compared to a fixed-rate jumbo loan. Just be sure you can handle potentially higher payments down the road. Compare