Adjustable Rate Mortgage
An adjustable-rate mortgage (ARM) has an interest rate that changes periodically through the life of the loan. ARMs come with an introductory period with a low, fixed rate. After this initial period, the interest rate applied to the outstanding balance varies based on the market index.
How the FHA ARM Works
The interest rate you get after the initial period is over is based on an index and your lender’s margin (which should be disclosed when you apply for the loan). The new interest rate is calculated by adding the margin to the index. As the index figure changes, so will your interest rate. The FHA accepts market index figures of the Constant Maturity Treasury (CMT) index or the 1-year London Interbank Offered Rate (LIBOR).
The idea of a large swing in the interest rates might make an ARM less appealing. That’s why the FHA places two types of caps, to provide a safeguard from astronomically high (or low) rates. There is an annual cap, which limits the points your interest rate can change year to year, and a “life-of-the-loan” cap that restricts the amount it can vary for the entire term of the loan.
FHA's ARM
The FHA has a few adjustable-rate mortgage options that can suit the needs of many borrowers. It offers a standard 1-year ARM and four "hybrid" ARM products, which have an initial interest rate that is fixed for the first 3, 5, 7, or 10 years. After that initial period, the interest rate adjusts annually.
The Pros
Choosing to finance a home with an ARM can work extremely well for some borrowers for a few reasons.
- Borrowers who intend to move and sell their home within a few years can take advantage of the low interest rates that come with the initial period of an adjustable-rate mortgage.
- Many homebuyers use the introductory period to save and budget for the future.
- Some borrowers may be expecting a significant increase in their income.
The Cons
It’s important to remember the downsides that come with the uncertainty of ARMs in order to make the best decision.
- There is always the chance that the index can go up drastically and your interest rate can skyrocket.
- When there is an uncertainty of how much you’ll be spending on monthly mortgage payments, budgeting isn’t as easy to do.
FHA Loan Articles
November 22, 2023In the last days of November 2023, mortgage loan rates flirted with the 8% range but have since backed away, showing small but continued improvement. What does this mean for house hunters considering their options to become homeowners soon?
November 4, 2023In May 2023, USA Today published some facts and figures about the state of the housing market in America. If you are weighing your options for an FHA mortgage and trying to decide if it’s cheaper to buy or rent, your zip code may have a lot to do with the answers you get.
October 14, 2023FHA loan limits serve as a crucial mechanism to balance financial sustainability, regional variations in housing costs, and the agency's mission to promote homeownership, particularly for those with limited financial resources.
September 25, 2023Mortgage rates are hitting prospective homeowners hard this year and are approaching 8%, a rate that didn't seem very likely last winter. With so many people priced out of the market by the combination of high rates and a dwindling supply of homes.
September 19, 2023The FHA Handbook serves as a crucial resource for mortgage lenders, appraisers, underwriters, and other professionals involved in the origination and servicing of FHA-insured home loans. It outlines the policies and requirements for FHA-insured mortgages.
September 13, 2023FHA rehab loans are a specialized type of mortgage loan offered by the Federal Housing Administration that allows borrowers to finance both the purchase or refinance of a home and the cost of needed repairs.
