June 9, 2023
Borrowers considering their FHA mortgage loan options might wonder about an FHA Adjustable Rate Mortgage or FHA ARM loan option instead of an FHA fixed-rate home loan.
It is a great idea to compare the features of both types of loan side-by-side to see which might make sense for you.
The motivation to do this now has much to do with the interest rate environment we are still dealing with in 2023–in spite of hopes of improvement as the summer wears on.
Why would an FHA ARM loan make more sense for some borrowers? Because an ARM offers a lower introductory or teaser interest rate. You may have the option to keep that rate for a full year or as long as ten years. Much will depend on the type of ARM your lender offers.
Upon the expiration of the introductory rate, your FHA ARM loan is subject to interest rate adjustments, limited under the FHA loan program as we will explore below.
FHA ARM Loans: A Primer
An FHA ARM has an index, a margin, an introductory rate period and a cap on how many adjustments may be made over the mortgage term.
At the end of your introductory rate, your lender will give you a new interest rate calculated by adding a margin to the index.
The lender should let you know the margin at application time. Things to remember:
- As the index figure changes, your interest rate will be adjusted accordingly.
- Acceptable index options on FHA-insured ARM loan transactions are the Constant Maturity Treasury index (weekly average yield of U.S. Treasury securities, adjusted to a constant maturity of one year); OR the 1-year London Interbank Offered Rate also known as LIBOR.
- Changes in the interest rate are limited by the interest rate cap of the ARM loan.
ARM Loan Adjustments
FHA ARM loans have adjustment schedules:
- 1- and 3-year ARMs “may increase by one percentage point annually” after the introductory rate period expires. These loans may be adjusted for a maximum of five percentage points over the life of the Mortgage.
- 5-year ARMs “may either allow for increases of one percentage point annually and five percentage points” over the loan term. They may alternatively permit increases of two percentage points annually and six points total.
- 7- and 10-year ARMs “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,” according to HUD.gov.
Ask your FHA loan officer to show you available fixed-rate and adjustable-rate mortgage loan options to compare costs and requirements. Not all lenders will offer the same options, which is why it pays to shop around for a lender.
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.
Browse by Date: