Considering an FHA Adjustable Rate Mortgage?
September 1, 2023
In late 2022, some financial pundits looked at the state of the housing market, inflation, and the Fed's efforts to stabilize the economy and made their predictions for the coming new year.
Some of these anticipated a housing market recovery beginning in the third quarter of 2023. For the first two quarters of the year, January through June, rates were still at or near the seven percent range.
Housing Market Recovery Coming Soon?
Come August, the middle of the third quarter, we see some sources report mortgage loan interest rates near the eight percent range.
What is a house hunter to do in these circumstances? Some cannot wait out the current high interest rate environment. And these borrowers often turn to adjustable rate mortgages to get into a lower rate, hoping to ride out current conditions until it’s safe to refinance later.
Why You Should Consider an FHA Adjustable Rate Mortgage
The FHA ARM is an important option when buying a home in today’s rate environment. If you have already looked at conventional ARM loan options, be sure and compare them with the FHA version of the adjustable rate mortgage.
Why? Because the FHA has strict rules about how many adjustments can be made, how often, and by how much.
FHA ARM Loan Rules
When applying for an FHA ARM, your lender will set the initial interest rate and the margin. What’s the margin? According to the Consumer Financial Protection Bureau, the margin is "the number of percentage points added to the index by the mortgage lender to set your interest rate on an adjustable rate mortgage (ARM) after the initial rate period ends."
The margin must be set in your loan agreement and won't change, it must remain the same for the entire term of the refinance loan.
There is an introductory rate which must remain constant for an initial period. How long? One year to 10 years. After that introductory rate ends, the rate will change each year until the loan term ends.
FHA ARM Loan Adjustment Rules
According to HUD.gov:
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The ARM is an FHA Adjustable Rate Mortgage
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Some of these anticipated a housing market recovery beginning in the third quarter of 2023. For the first two quarters of the year, January through June, rates were still at or near the seven percent range.
Housing Market Recovery Coming Soon?
Come August, the middle of the third quarter, we see some sources report mortgage loan interest rates near the eight percent range.
What is a house hunter to do in these circumstances? Some cannot wait out the current high interest rate environment. And these borrowers often turn to adjustable rate mortgages to get into a lower rate, hoping to ride out current conditions until it’s safe to refinance later.
Why You Should Consider an FHA Adjustable Rate Mortgage
The FHA ARM is an important option when buying a home in today’s rate environment. If you have already looked at conventional ARM loan options, be sure and compare them with the FHA version of the adjustable rate mortgage.
Why? Because the FHA has strict rules about how many adjustments can be made, how often, and by how much.
FHA ARM Loan Rules
When applying for an FHA ARM, your lender will set the initial interest rate and the margin. What’s the margin? According to the Consumer Financial Protection Bureau, the margin is "the number of percentage points added to the index by the mortgage lender to set your interest rate on an adjustable rate mortgage (ARM) after the initial rate period ends."
The margin must be set in your loan agreement and won't change, it must remain the same for the entire term of the refinance loan.
There is an introductory rate which must remain constant for an initial period. How long? One year to 10 years. After that introductory rate ends, the rate will change each year until the loan term ends.
FHA ARM Loan Adjustment Rules
According to HUD.gov:
- 1- and 3-year ARMs "may increase by one percentage point annually after the initial fixed interest rate period, and five percentage points over the life of the Mortgage."
- 5-year ARMs may see a one percentage point increase annually, with a cap of five percentage points for the entire term. Alternatively, you may qualify for "increases of two percentage points annually and six points over the life of the Mortgage."
- 7- and 10-year ARM loans are permitted to increase by two percentage points annually after the intro rate ends. There can be six percentage points adjusted over the term of the loan.
------------------------------
RELATED VIDEOS:
The ARM is an FHA Adjustable Rate Mortgage
A Few Tips About Your Fixed Rate Mortgage
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