Are you looking for an FHA adjustable rate mortgage in 2017? FHA single family home loans come in a variety of types including fixed-rate loans and FHA adjustable rate mortgages. The rules for these loans, commonly referred to as FHA ARM loans, are spelled out in HUD 4000.1, the FHA loan handbook.
FHA adjustable rate loans can be different than their conventional counterparts, starting with certain restrictions on how often the interest rate may change. Before we dive into that issue, let’s examine how HUD 4000.1 defines the FHA ARM loan:
“An Adjustable Rate Mortgage (ARM) refers to a Mortgage in which the interest rate can change annually based on an index plus a margin.”
Your loan officer is required to provide a disclosure form, which must be signed, that fully explains the terms of an FHA adjustable rate mortgage. Informed borrowing is an important part of any home loan, but where ARM loans are concerned the borrower should fully understand how such lending works.
According to HUD 4000.1, the is required to establish “the initial interest rate and the margin”, and that margin must be constant, according to FHA loan rules, for “the entire term of the Mortgage”.
When it comes to interest rates, the initial rate must be consistent for an initial time frame from one to ten years depending on what kind of loan you and the lender agree upon. Once the initial rate period has expired, the rate may change for “the remainder of the mortgage term” according to the FHA loan handbook.
According to the rules, one-year and three-year FHA adjustable rate loans “may increase by one percentage point annually after the initial fixed interest rate period, and five percentage points over the life of the Mortgage”. That kind of predictability is a good thing for the borrower, and can help you determine whether such a loan is right for you. When it comes to five-year FHA ARM loans, these “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”.
For longer terms-seven to 10 year FHA adjustable rate mortgages, the interest rate “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”.
Talk to your lender to see if an FHA ARM loan is right for you based on your financial needs and goals. We will examine other details of FHA ARM loans in future blog posts.