FHA Adjustable Rate Mortgage – ARM

FHA Adjustable Rate Mortgage (ARM)

FHA Adjustable Rate Mortgage

Most home buyers opt for a 30 year fixed mortgage when purchasing a home. However, the FHA adjustable rate mortgage is becoming more popular for home buyers who are looking for a lower monthly payment.

What is an FHA Adjustable Rate Mortgage?

An FHA adjustable rate mortgage provides home buyers with an opportunity to qualify for a larger loan amount while also reducing the monthly payments.

FHA adjustable mortgages have a fixed rate for the initial term. Then, after the fixed term is over, the rate will adjust annually for the life of the loan.

How an FHA Adjustable Rate Mortgage Works

An adjustable rate mortgage is comprised of the following:

  1. Initial start rate and term – The initial start rate will be based upon the index plus the margin. It will last for the initial term length of the arm you are applying for.
  2. The Index – The index (usually the LIBOR – London Interbank Offered Rate) is what each adjustment will be based. Then, the margin will be added to the LIBOR rate and when added together, they make up your interest rate.
  3. The Margin – The margin is the spread over the index that the lender will charge. This is where you should shop for a competitive lender. Whoever has the lower margin will likely result in the lowest possible rate.
  4. The Interest Rate Caps – The interest rate caps indicate the most your rate can increase from one year to the next and also over the life of the loan. Typically the caps are 2/6 which means your rate cannot increase more than 2% at any one time and cannot adjust more than a total of 6% over the life of the loan.

Shopping lenders for the lowest margin and longest initial term will be most beneficial for you. Find an FHA lender to get a quote.

Types of FHA Adjustable Rate Mortgages – ARMs

The FHA offers adjustable rate mortgages in 1, 3, 5, 7, and 10-year versions of the program.  This FHA adjustable rat chart shows the initial fixed period, the annual and lifetime rate caps for each.

Type of ARM Fixed Period Maximum Annual Adjustment Maximum Lifetime Adjustment
1 Year ARM 1 Year 1% 5%
3/1 Year ARM 3 Years 1% 5%
5/1 ARM 5 Years 2% 6%
7/1 ARM 7 Years 2% 6%
10/1 10 Years 2% 6%

*Above is an FHA Adjustable Rate Mortgage Chart

Pros and Cons of an FHA Adjustable Rate Mortgage (ARM)

An adjustable rate mortgage is not right for everyone. However, for some it may be exactly what is needed over the short term.

Pros

    • Lower initial interest rate vs a fixed rate mortgage
    • Lower initial monthly payments
    • Qualify using the initial rate which may allow for a larger loan amount

Cons

    • Uncertainty of where rates will go
    • Future payment could increase after each adjustment period

If you are unsure whether an adjustable rate mortgage is for you, then speak with one of our lenders to discuss your personal scenario and to get a quote.

FHA Adjustable Interest Rates

The rates for the FHA adjustable (ARM) mortgages are going to be lower than the 30 year fixed rates. You can expect the ARMs with the shortest initial fixed period (3yr-5yr) to have lower rates than the arms with longer initial fixed rate periods (7yr-10yr).

Rates will be anywhere from .25%-1.25% lower than a 30 year fixed rate depending upon which loan you choose.

5/1 FHA Arm Caps

The 5/1 FHA ARM caps are no more than 2% for any one adjustment period and no more than a total of 6% over the life of the loan.

FHA Adjustable Rate Indices – Indexes

The adjustable rates are calculated from one of two indexes before the lender’s margin is added. They are as follows:

  1. Constant Maturity Treasury (CMT) – 1 year – See CMT Rates
  2. London Interbank Offered Rate (LIBOR) – 1 year See LIBOR Rates

Ask your lender to provide a quote using both indexes to see which would be most beneficial for you.

Temporary Interest Rate Buy Downs

Temporary interest rate buy downs are not allowed with FHA adjustable rate mortgages

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