FHA Adjustable Rate Mortgages: An Option When Rates Are High
June 12, 2023
If you are thinking about an FHA mortgage, you may wonder whether it’s smart to consider an FHA Adjustable Rate Mortgage or FHA ARM loan option side-by-side with an FHA fixed rate mortgage.
The reason? In an era of elevated mortgage loan interest rates, an ARM loan makes more sense for some borrowers. The FHA ARM offers a lower introductory or teaser interest rate, and you may have the option to keep that rate for a full year or as long as ten years, depending on the type of ARM your lender offers.
After the introductory rate, the ARM loan is subject to periodic adjustments, limited under the FHA loan program in ways a conventional lender may not limit them.
How FHA ARM Loans Work
An FHA ARM has an index, a margin, and an introductory rate period. There is also a cap on how many adjustments may be made over the mortgage term.
At the end of your introductory rate, your new interest rate is calculated “by adding a margin to the index.” The margin is something the lender should let you know about when you apply for the loan.
HUD.gov advises:
FHA ARM loans have the following adjustment schedules according to the FHA. When reading the below, the “1-year” and “3-year” and similar designations refer to how long the introductory rate is--a “5-year ARM” refers to an FHA adjustable rate mortgage that has a five-year introductory rate period.
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The reason? In an era of elevated mortgage loan interest rates, an ARM loan makes more sense for some borrowers. The FHA ARM offers a lower introductory or teaser interest rate, and you may have the option to keep that rate for a full year or as long as ten years, depending on the type of ARM your lender offers.
After the introductory rate, the ARM loan is subject to periodic adjustments, limited under the FHA loan program in ways a conventional lender may not limit them.
How FHA ARM Loans Work
An FHA ARM has an index, a margin, and an introductory rate period. There is also a cap on how many adjustments may be made over the mortgage term.
At the end of your introductory rate, your new interest rate is calculated “by adding a margin to the index.” The margin is something the lender should let you know about when you apply for the loan.
HUD.gov advises:
- As the index figure moves up or down, your interest rate will be adjusted accordingly.
- Acceptable index options on FHA-insured ARM loan transactions are the Constant Maturity Treasury index (weekly average yield of U.S. Treasury securities, adjusted to a constant maturity of one year); OR the 1-year London Interbank Offered Rate.
- Changes in the interest rate are limited by the interest rate cap structure of the ARM loan.
FHA ARM loans have the following adjustment schedules according to the FHA. When reading the below, the “1-year” and “3-year” and similar designations refer to how long the introductory rate is--a “5-year ARM” refers to an FHA adjustable rate mortgage that has a five-year introductory rate period.
- 1- and 3-year ARMs “may increase by one percentage point annually” after the introductory rate period expires. These loans may be adjusted for a maximum of five percentage points over the life of the mortgage.
- 5-year ARMs “may either allow for increases of one percentage point annually and five percentage points” over the loan term. They may alternatively permit increases of two percentage points annually and six points total.
- 7- and 10-year ARMs “may only increase by two percentage points annually after the initial fixed interest rate period, and six percentage points over the life of the mortgage,” according to HUD.gov.
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