FHA Fixed Rate Loan or FHA ARM?
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In a housing market where mortgage rates are higher than they have been in many years, the adjustable-rate FHA loan is an option many consider. How do these loans differ, and how are they similar? We examine the finer points below.
FHA Fixed Rate Mortgages
An FHA mortgage includes a low 3.5% down payment for those with qualifying FICO scores, comparatively lower interest rates due to being government-backed, and the ability to refinance the loan later on with no FHA-required credit check or appraisal under the FHA streamline refinance program.
FHA fixed-rate loans have a rate set at the beginning of the loan, which does not change unless the borrower chooses to refinance.
The rate offered is then based on then-current rate information, the borrower's FICO scores current at application time, and other variables. FHA loans require mortgage insurance for either 11 years or the lifetime of the loan, depending on the down payment and other factors.
FHA Adjustable Rate Mortgages (FHA ARM Loans)
What’s the major difference between an FHA fixed-rate loan and an FHA adjustable-rate mortgage? Most of the other features of an FHA ARM are the same, but there are major differences in the interest rate.
Instead of a single rate for the loan's lifetime, the borrower is offered an introductory rate that may be lower than some other mortgage options.
But that rate doesn’t last. It expires, and when it does, there are rate adjustments that begin on a controlled basis. FHA loan rules restrict how much the rate can increase in any one adjustment and also restrict how many times the rate may be adjusted.
Introductory Rates
Depending on the lender and the options offered, you may qualify for an introductory rate for as long as ten years. Once that period expires, many borrowers plan to refinance the loan to avoid the higher rate.
According to HUD.gov, “When the initial interest rate period has expired, the new interest rate is calculated by adding a margin to the loan index.”
Furthermore, “Your lender will disclose the margin at the time of loan application,” and these margins “may vary from lender to lender.” It is wise to shop around for the lowest margin you can find.
The choice to apply for an ARM or an FHA fixed-rate loan is personal. There are no guarantees about the future of home loan interest rates, and many choose to hedge their bet and apply for an ARM loan rather than hoping that rates will come down to a lower level in the meantime.
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