FHA Adjustable Rate Mortgages
This variety of options to choose from isn’t limited to the type of loan--you can also choose between certain types of interest rate agreements. Did you know you can apply for new purchase or refinance FHA loans that come with adjustable interest rates?
The FHA official site has a page dedicated to Adjustable Rate Mortgages (also known as ARM loans) that can help you understand your options. According to www.FHA.gov, and ARM loan is defined as follows:
“An ARM is an Adjustable Rate Mortgage. Unlike fixed rate mortgages that have an interest rate that remains the same for the life of the loan, the interest rate on an ARM will change periodically. The initial interest rate of an ARM is lower than that of a fixed rate mortgage, consequently, an ARM may be a good option to consider if you plan to own your home for only a few years; you expect an increase in future earnings; or, the prevailing interest rate for a fixed rate mortgage is too high.”
If you have never considered buying a home with a strategy, you might want to explore this FHA loan option as it can be part of a good strategy for some home buyers depending on financial needs.. As the FHA says, if you purchase now but know you don’t plan to be in the home long-term, an ARM could be the best option.
FHA ARM loans feature four components including an index, a margin, an initial or “teaser” rate period, and an interest rate cap. According to the FHA, “When the initial interest rate period has expired, the new interest rate is calculated by adding a margin to the index. Your lender will disclose the margin at time of loan application (margins may vary from lender to lender, so it’s a good idea to shop around for a low margin).”
As the index figure moves up or down, the FHA official site says a borrower’s interest gets adjusted accordingly; “Acceptable index options on FHA insured ARM loan transactions are 1) the Constant Maturity Treasury (CMT) index (weekly average yield of U.S. Treasury securities, adjusted to a constant maturity of one year); or 2) the 1-year London Interbank Offered Rate (LIBOR). Increases or decreases in the interest rate will be limited by the interest rate cap structure of your loan.”
The interest rate cap is a very important protection for FHA borrowers who apply for the ARM option--it keeps the rate from going too high over a given period of time. Speak to a loan officer about your ARM loan options and how the interest rate cap can work to help you.
Learn About the Path to Homeownership
Take the guesswork out of buying and owning a home. Once you know where you want to go, we'll get you there in 9 steps.
Step 1: How Much Can You Afford?
Step 2: Know Your Homebuyer Rights
Step 3: Basic Mortgage Terminology
Step 4: Shopping for a Mortgage
Step 5: Shopping for Your Home
Step 6: Making an Offer to the Seller
Step 7: Getting a Home Inspection
Step 8: Homeowner's Insurance
Step 9: What to Expect at Closing
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