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FHA Adjustable Rate Mortgages, also known as FHA ARM loans, are a bit more complex than their fixed-rate mortgage counterparts. There are some frequently asked questions about FHA ARM loans borrowers should know the answers to when they begin planning for their new home loan.

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FHA Adjustable Rate Mortgage Questions and Answers

FHA Adjustable Rate Mortgage Questions and Answers
August 26, 2018 - FHA Adjustable Rate Mortgages, also known as FHA ARM loans, are a bit more complex than their fixed-rate mortgage counterparts. There are some frequently asked questions about FHA ARM loans borrowers should know the answers to when they begin planning for their new home loan.

What is an FHA Adjustable Rate Mortgage?

The FHA Adjustable Rate Mortgage is defined in HUD 4000.1 as, “a Mortgage in which the interest rate can change annually based on an index plus a margin”. The rate will be adjusted based on the initial type of loan. There are multiple types of ARM loan, based on the length of the introductory rate period. From HUD 4000.1:

“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.”

Can I Pay for Interest Rate Buydowns With an FHA ARM Loan?

HUD 4000.1 states that adjustable rate mortgages backed by the FHA are not eligible for temporary interest rate buydowns.

How is the Monthly Mortgage Rate Payment Calculated?

Your FHA lender will process your loan with payments calculated with the initial interest rate. In the case where the introductory interest rate on the FHA ARM loan is one year and, HUD 4000.1 instructs the lender;

“If the Loan-to-Value (LTV) is 95 percent or more, the Mortgagee must underwrite the Mortgage based on payments calculated using the initial interest rate plus one percent. If the Mortgage is less than 95 percent, the Mortgagee must underwrite the Mortgage based on payments calculated using the initial interest rate.”

How Long Can My FHA Adjustable Rate Mortgage Be?

HUD 4000.1 states that the ARM loan must “be fully amortizing” over no more than 30 years.

When Do the FHA ARM Loan Rates Get Adjusted?
                      
Depending on the length of the introductory rate, the adjustment may occur sooner shorter introductory interest rate periods, but there is a mandatory “no-later-than” adjustment requirement.

For example, a one-year introductory rate will require the first rate adjustment no sooner than 12 months, but no later than 18 months. For three-year introductory rate, the first adjustment is due in 36 months, but no later 42 months.

Ask your loan officer when the first adjustment on your FHA ARM loan will occur based on the length of the introductory rate and the financial institution’s standards for rate adjustments.

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