How FHA Adjustable Rate Mortgages Work
Borrowers choose an adjustable rate mortgage, also known as an ARM loan when the introductory rate is more competitive than the fixed rate loan option. These buyers may plan to sell before a rate adjustment, or after the first adjustment. ARMs are best for those who approach the loan with a strategy to deal with the rate adjustments. How do they work?
What follows are the FHA loan rules for FHA ARM loans. This information is not applicable to any ARM loan, these are the guidelines for the FHA Single Family Home Loan program.
How an FHA Adjustable Rate Mortgage Works
As mentioned above, the interest rate on an ARM will change after the introductory rate period ends. The FHA official site describes ARMs as having four components:
- An index
- A margin
- An interest rate cap structure
- An initial interest rate period.
FHA ARM loan interest rate caps are meant to protect the borrower from major interest rate changes. There is an annual cap and a cap for the duration of the mortgage. FHA loans feature a 1-year ARM and four "hybrid" ARM options.
What’s a Hybrid ARM Loan?
Hybrid ARM loans are designed with an introductory rate that does not change for a specified period. That may last for three, five, seven, or even 10 years before the rate changes. Once it does change it may be adjusted annually.
- According to FHA loan rules. 1- and 3-year ARMs, “may increase by one percentage point annually” after the initial rate expires. These loans may increase “by five percentage points over the life of the Mortgage.”
- 5-year ARMs may increase by one percentage point annually, and five percentage points over the life of the Mortgage. They may also be structured to increase by two percentage points annually, and six points over the term of the loan.
- 7- and 10-year ARMs increase by two percentage points annually after the initial rate period expires. These loans are capped at six percentage points over the life of the loan.
------------------------------
RELATED VIDEOS:
The ARM is an FHA Adjustable Rate Mortgage
Understanding APR
A Few Words About Bankruptcy
Do you know what's on your credit report?
Learn what your score means.