If you are considering your FHA loan options, at some point you’ll likely consider your choices between mortgage loan interest rate options. Qualified borrowers can choose between a fixed-rate FHA mortgage or an adjustable rate loan.
Fixed rate loans seem simple and straightforward enough. The borrower applies for a home loan at an interest rate negotiated between borrower and lender. But what about adjustable rate mortgages?
These loans, often called ARM or FHA ARM loans, feature an introductory rate, and a higher rate that begins at a specified point in the course of the mortgage. According to the FHA loan rulebook, HUD 4000.1, “The Mortgagee must establish the initial interest rate and the margin. The margin must be constant for the entire term of the Mortgage.”
How long does your introductory interest rate last? According to HUD 4000.1, the rate must, “remain constant for an initial period of 1, 3, 5, 7, or 10 years, depending on the ARM program chosen by the Borrower, and then may change annually for the remainder of the mortgage term.”
Increases to your interest rate depend on a few variables including the nature of your ARM loan. “A 1- and 3-year ARM may increase by one percentage point annually after the initial fixed interest rate period, and five percentage points over the life of the Mortgage.”
HUD 4000.1 also says, “A 5-year ARM may either allow for increases of one percentage point annually, and five percentage points over the life of the Mortgage; or increases of two percentage points annually, and six points over the life of the Mortgage. A 7- and 10-year ARM may only increase by two percentage points annually after the initial fixed interest rate period, and six percentage points over the life of the Mortgage.”
FHA loan rules say the borrower is required to read and sign a disclosure form which explains the terms of the ARM at mortgage application time.
Borrowers who consider an ARM loan should think about their goals and plans for the home they are purchasing. Do you plan to sell or refinance before your introductory rate expires? If so, an FHA ARM loan might be a good choice. If you plan to stay in the home long-term, you may wish to compare ARM loans with the fixed rate option to see which makes more financial sense over the lifetime of the loan or the amount of time you will remain in home.