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Why choose an FHA adjustable rate mortgage, also known as an FHA ARM? Why refinance into one? When interest rates are rising some consider the ARM loan as part of a larger strategy to save money on the loan, long-term.

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Why Do People Choose FHA Adjustable Rate Mortgages?

July 1, 2022

Why Do People Choose FHA Adjustable Rate Mortgages?
Why choose an FHA adjustable rate mortgage, also known as an FHA ARM? Why refinance into one? When interest rates are rising some consider the ARM loan as part of a larger strategy to save money on the loan, long-term.

There are some good reasons to consider an ARM. Do you need a lower rate in the early days of the mortgage to help you pay down the mortgage principal faster? Or do you plan to sell the home early and are hoping for a more competitive interest rate option?

What You Should Know About FHA ARMs

You’ll be offered an introductory rate with an FHA adjustable rate mortgage, and that rate will expire after a fixed set of time, the shortest and most typical being one year. FHA ARM loans can have longer introductory rates (also known as a teaser rate) up to ten years.
 
Once the teaser rate expires, the rate adjustments begin periodically according to the timetable you and the lender agree on.

Planning Counts

You may have a better experience with an FHA ARM loan if you go into the mortgage with a plan to deal with the rate adjustments. Do your plans include selling or refinancing before the introductory or initial ARM loan rate expires? You should at least give those options a look. But they aren’t the only choices open to you.

Some kinds of ARM loan planning are better suited for longer teaser rate periods. If your intro rate is only a year long, selling the home before the first rate adjustment could be challenging. Refinancing might be a better option to consider in such cases.

Some borrowers also use ARM loans to make it easier to pay more on the loan in the earliest days of the mortgage--the lower rate frees up extra cash that can be applied to the mortgage.

Then there are the house hunters who expect a pay increase or career changes at some stage may help them afford the rate adjustments later on. For these borrowers, accepting the higher rate is an option, but that’s not true for all borrowers.

When not to Think About an ARM Loan

A 2021 Time Magazine article bore the headline, “ARM Loans Aren’t Worth the Risk When Mortgage Rates Are Low.”

This is sound advice. Mortgage loan interest rates that have hit historic lows do start increasing again at some stage, and with an ARM you may find yourself in the middle of a rate adjustment period during a time of rising interest rates. Could your ARM loan become more expensive as you go if you get your teaser rate when the mortgage industry had access to far better interest rates?

Then there’s the variable of time. The longer your teaser rate lasts, the harder it may be to predict which direction rates might be heading when that happens. It is best to have an exit strategy to deal with a scenario like that if you have a five-year, seven-year, or 10-year ARM.

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