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FHA ARM Loans: Good Or Bad Idea?

June 15, 2022

FHA loans

Why do people choose FHA adjustable-rate mortgages or choose to refinance with one? There are several reasons including the need to get into a lower rate upfront, as part of an overall strategy for buying and selling the home, or to take advantage of changing interest rates.

ARM Loan Basics

FHA Adjustable Rate Mortgages feature an introductory rate, and that rate expires after a set amount of time, typically one year. The introductory rate can also be set between three and 10 years. After that time period, the rate adjustments begin.

Borrowers do better with ARM loans when they have a strategy for dealing with the rate adjustment periods. Do you plan to sell or refinance before the introductory or initial ARM loan rate expires? 

That plan works better for those with longer intro rates. It may be harder to sell the home earlier depending on a variety of factors including the state of the housing market. 

And if you are trying to beat a one-year ARM loan introductory rate, it may be better to consider refinancing instead…but much depends on your circumstances.

Who Is Right For An FHA ARM Loan?

Who should consider an FHA ARM? There are some basic categories. Those who might be able to pay off the mortgage before the intro or “teaser” rate expires should consider an ARM. 

How likely that might be in your own circumstances depends on you but the other option is to refinance the loan into a fixed-rate mortgage at the end of the introductory rate. 

That may be a better choice for shorter intro ARM loan terms. Some borrowers also use ARM loans specifically to pay down more of the principal earlier in the loan–they take advantage of the lower interest rate and pay more each month.

Who else is right for an ARM loan? Those who anticipate a pay increase along the way that may help them afford the rate adjustments later on. And then there are those who know they won’t own the home long enough to be affected by the expiration of the intro rate. 

These may be military members who know they will be reassigned in a few years, or they may be upwardly mobile buyers who expect frequent job changes and relocations along the way.

When Not To Consider An FHA ARM Loan

Time Magazine posted an article in 2021 titled, “ARM Loans Aren’t Worth the Risk When Mortgage Rates Are Low”. Why? Because at the lower end of the mortgage rates, you are likely only to experience higher rates once the ARM rate adjustments begin.

When rates are at or near historic lows, an ARM loan may not have much to offer. Rate increases, once they begin, will reflect the interest rate environment of the times they are adjusted in, and if rates are on the rise, ARM loans look more attractive than they do when rates are low. 

And don’t forget that the longer your teaser rate, the harder it may be to predict which direction rates might trend toward. Having an exit strategy for a longer-term ARM loan is a smart idea.

Joe Wallace - Staff Writer

By Joe Wallace

Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.

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