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FHA ADJUSTABLE RATE MORTGAGE
Section 251 insures home purchase or refinancing loans with interest rates that may increase or decrease over time (adjustable rate mortgages), enabling consumers to purchase or refinance their home at a lower initial interest rate.
FHA administers a number of programs, based on Section 203(b), that have special features. One of these programs, Section 251, insures adjustable rate mortgages (ARMs) which, particularly during periods when interest rates are high, enable borrowers to obtain mortgage financing that is more affordable by virtue of its lower initial interest rate. This interest rate is adjusted annually, based on market indices approved by FHA, and thus may increase or decrease over the term of the loan.
FHA administers a number of programs, based on Section 203(b), that have special features. One of these programs, Section 251, insures adjustable rate mortgages (ARMs) which, particularly during periods when interest rates are high, enable borrowers to obtain mortgage financing that is more affordable by virtue of its lower initial interest rate. This interest rate is adjusted annually, based on market indices approved by FHA, and thus may increase or decrease over the term of the loan.
Type of Assistance:
This program provides insurance for adjustable-rate mortgages, used in conjunction with other
widely used FHA single-family products -
Mortgage Insurance for One- to Four-Family Homes (Section 203(b)),
Single-Family Rehabilitation Mortgage Insurance (Section 203(k)), and
Single-Family Mortgage Insurance for Condominium Units (Section 234(c)).
Under this FHA-insured mortgage product, the initial interest rate and monthly payment are low,
but these may change during the life of the loan. FHA uses 1-year Treasury Constant Maturities
Index to determine interest rate changes. The maximum amount the interest rate may increase or
decrease in any one year is 1 percentage point. Over the life of the loan, the maximum interest
rate change is 5 percentage points from the initial rate. Lenders must disclose to the borrower
the terms of the ARM at the time of loan application. In addition, borrowers must be informed at
least 25 days in advance of any adjustment to the monthly payment. In most other respects,
Section 251 loans are similar to basic FHA-insured single-family loans:
-- Downpayment requirements can be low-as little as 3 percent. This is because FHA insurance
allows borrowers to finance approximately 97 percent of the value of their home purchase through
their mortgage.
-- Many closing costs can be financed. This program allows the borrower to finance many of these
charges, thus reducing the up-front cost of buying a home. However, not all of these up-front
expenses can be folded into the mortgage. In addition to the downpayment, the purchaser must
pay for items such as the appraisal and the title search. FHA mortgage insurance is not free:
borrowers pay an up-front insurance premium (which may be financed) at the time of purchase,
as well as monthly premiums that are not financed, but instead are added to the regular mortgage
payment.
-- Some fees are limited. FHA rules impose limits on some of the fees that lenders may charge
in making a loan. For example, the loan origination charge charged by the lender for the
administrative cost of processing the loan may not exceed one "point"-that is, one percent
of the amount of the mortgage (minus the mortgage insurance premium, if it is being financed).
In addition, property appraisal and inspection fees are set by FHA.
-- HUD sets limits on the amount that may be insured. To make sure that its programs
serve low- and moderate-income people, FHA sets limits on the dollar value of the
mortgage loan. See the current FHA mortgage lending limits. These figures vary
over time and by place, depending on the cost of living and other factors (higher
limits also exist for two- to four-family properties).
Eligible Customers:
All persons intending to occupy the property as their principal residence are eligible
to apply. (All FHA-approved lenders may make adjustable rate mortgages; creditworthy
applicants may qualify for such loans.)
Application:
Any person able to meet the cash investment, the mortgage payments, and credit
requirements can apply. The program is generally limited to owner-occupants.
Applications are made through an FHA-approved lending institution.
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