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An FHA ARM loan can, for those who qualify, offer a lower introductory interest rate for at least one year, featuring interest rate adjustments specified over a period of time specified in the loan agreement.

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October 17, 2017
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FHA Loan Articles

News and Updates for Homeowners

2017 FHA ARM Loan Rates - Basic Rules

September 11, 2012 - Many borrowers aren't aware that the FHA offers Adjustable Rate Mortgages (ARM loans) for qualified borrowers. An FHA ARM loan can, for those who qualify, offer a lower introductory interest rate for at least one year, featuring interest rate adjustments specified over a period of time specified in the loan agreement.

FHA ARM loans can include an introductory rate fixed for as little as one year or up to as many as 10 years. Once that introductory period is over, the loan's interest rate may be adjusted between one and two interest rate points, and the loan features an "interest rate cap" which is held in place for the lifetime of the loan. That cap can limit the interest rate changes up to six points, depending on the loan.

According rules listed on FHA.gov, "The lender and borrower negotiate the initial interest rate and margin. The margin must be constant for the entire term of the mortgage. The interest rate remains constant for the initial period (either a 1, 3, 5, 7, or 10 year period, depending on the ARM) and then may change annually for the remainder of the loan term."

In part because of the changing interest rates, the FHA has special rules to insure transparency in lending for ARM loans.

HUD 4155.1 Chapter Six, Section B instructs the lender;

"When the borrower applies for an ARM loan, the lender must provide him/her with a written explanation of the

-- nature of the proposed obligation,

and

-- features of an ARM, consistent with the disclosure requirements applicable to variable-rate mortgages secured by a principal dwelling under the Truth-in-Lending Act (TILA), "Regulation Z" at 15 United States Code (USC) 1601, and 12 Code of Federal Regulations (CFR) 226.18."

FHA rules also require the lender to "provide the borrower with a hypothetical monthly payment schedule that displays the maximum potential increases in monthly payments for the term of the ARM. The hypothetical payment schedule should illustrate the maximum increases over the shortest possible time frame."

The FHA provides an example:

A seven-year ARM payment schedule should show the maximum potential increases over the three years following the initial fixed interest rate period of seven years, according to FHA.gov.
Such transparency rules are designed to help the borrower understand exactly how the FHA ARM mortgage works so he or she can plan accordingly. These transparency rules require the lender to present the following information in the mortgage documents for an ARM loan:

-- The initial interest rate
-- The ARM loan margin
-- The date of the first adjustment to the interest rate, and
-- The frequency of adjustments.

FHA ARM loan rules say interest rate changes must occur on an annual basis-they cannot be changed more frequently, according to HUD 4155.1 Chapter Six.

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