Some potential FHA borrowers might be surprised to learn that an FHA adjustable rate mortgage (FHA ARM) is an option to consider, but for those with specific financial needs and goals, an FHA ARM loan might be a very good idea. FHA adjustable rate mortgages have specific controls over how much and when an interest rate change may occur, but there are other rules that also affect this type of FHA mortgage.
All the rules for FHA ARM loans are found in HUD 4000.1, the FHA Single Family Loan Handbook. It says that the initial rate and margin are established by the lender, and that the margin must be constant over the entire term of the mortgage.
Furthermore, “The interest 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.”
Your monthly house payment is calculated based on the initial interest rate, as required in HUD 4000.1. “The Mortgagee must underwrite the Mortgage based on payments calculated using the initial interest rate”, so the borrower is not making payments based on an anticipated interest rate change somewhere down the line.
The FHA adjustable rate mortgage must be amortized over a 30-year period according to FHA loan rules. These rules also include some consumer-friendly requirements for the lender. Your mortgage documents must specify the following items as required in HUD 4000.1:
-initial interest rate;
-date of the first adjustment to the interest rate;
-frequency of adjustments.
That means that technically, the borrower should be fully aware of when and how the adjustments will occur. Informed borrowing is a very important thing, and when applying for an FHA ARM loan you should get clarification about any portion of the ARM you do not understand including when and how the interest rate changes take effect, when your payments would begin to change, and under what conditions they may increase or decrease.
Some borrowers apply for FHA adjustable rate mortgages with an eye on refinancing once the initial rate period expires. If you plan to do that, it’s important to be prepared for any increase in mortgage loan payments in the interim between your refinance loan application and loan approval.