What is an FHA loan rate? We discussed this question in our last blog post-that the FHA and HUD do not set or regulate interest rates on FHA mortgages, the ability of the borrower to buy discount points in order to lower the FHA loan rate up front, and how a borrower’s FICO scores can affect the kind of mortgage rates offered by the lender.
But there is still an important issue to cover-the difference between how fixed rate FHA mortgages work and how FHA adjustable rate mortgage loans (ARM loans) work. What are the primary differences between an FHA fixed-rate loan and an FHA ARM loan?
FHA Fixed Rate Mortgage Loans
FHA fixed rate mortgages feature one interest rate, negotiated up front between the borrower and lender. Once the loan has closed and the paperwork is signed, your FHA loan rate will remain exactly as it is over the lifetime of the mortgage. The only way to change the interest rate on your home loan with a fixed-rate FHA mortgage is to refinance into a lower rate. Many borrowers take advantage of the FHA Streamline Refinance Loan option to do this.
FHA Streamline Refinance loans are for existing FHA mortgages only, and require a benefit to the borrower. One of those benefits can be a lower interest rate or refinancing out of an FHA ARM loan into an FHA fixed rate mortgage. Talk to your participating lender to learn how you can refinance into a lower FHA mortgage rate using the FHA Streamline program.
FHA Adjustable Rate Mortgages (ARMs)
FHA Adjustable Rate Mortgages or ARM loans are much different than their fixed rate loan counterparts. With an FHA ARM, you will be offered an introductory or “teaser” rate that will expire on a set date. Once that introductory FHA loan rate has expired, there are rules that limit how much the interest rate may increase or decrease each time, when it may do so, and by how much over the lifetime of the entire loan.
At the time of this writing, FHA loan rules in HUD 4000.1 indicate that the maximum FHA loan rate change or adjustment over the lifetime of the entire loan is six percentage points depending on the type of ARM loan you get.
The “type” of ARM loan depends on how long the introductory rate lasts–one year, three years, five years, etc. The longest introductory rate period possible (at the time of this writing) according to the FHA loan handbook is 10 years.
Generally, depending on the kind of ARM loan you have, the adjustments will be one or two points on an annual basis. The first interest rate adjustment may happen as soon as 12 months after loan closing, but as long as 120 months for the longest version of the FHA ARM loan.
You’ll need to discuss the length of the ARM loan with your lender to see what is appropriate based on your financial needs and goals.