Did You Know?

FHA insures adjusted rate mortgages, or ARMs. Interest rates for these loans can change on specific anniversaries, after a fixed-rate introductory period.

FHALoan.com
Click to Start Your Refinance or Purchase Loan

Adjustable Rate Mortgage

FHA Adjustable Rate Mortgage

An adjustable-rate mortgage (ARM) has an interest rate that changes periodically through the life of the loan. ARMs come with an introductory period with a low, fixed rate. After this initial period, the interest rate applied to the outstanding balance varies based on the market index.

How the FHA ARM Works

The interest rate you get after the initial period is over is based on an index and your lender’s margin (which should be disclosed when you apply for the loan). The new interest rate is calculated by adding the margin to the index. As the index figure changes, so will your interest rate. The FHA accepts market index figures of the Constant Maturity Treasury (CMT) index or the 1-year London Interbank Offered Rate (LIBOR).

The idea of a large swing in the interest rates might make an ARM less appealing. That’s why the FHA places two types of caps, to provide a safeguard from astronomically high (or low) rates. There is an annual cap, which limits the points your interest rate can change year to year, and a “life-of-the-loan” cap that restricts the amount it can vary for the entire term of the loan.

FHA's ARM

The FHA has a few adjustable-rate mortgage options that can suit the needs of many borrowers. It offers a standard 1-year ARM and four "hybrid" ARM products, which have an initial interest rate that is fixed for the first 3, 5, 7, or 10 years. After that initial period, the interest rate adjusts annually.

The Pros

Choosing to finance a home with an ARM can work extremely well for some borrowers for a few reasons.

  • Borrowers who intend to move and sell their home within a few years can take advantage of the low interest rates that come with the initial period of an adjustable-rate mortgage.
  • Many homebuyers use the introductory period to save and budget for the future.
  • Some borrowers may be expecting a significant increase in their income.

The Cons

It’s important to remember the downsides that come with the uncertainty of ARMs in order to make the best decision.

  • There is always the chance that the index can go up drastically and your interest rate can skyrocket.
  • When there is an uncertainty of how much you’ll be spending on monthly mortgage payments, budgeting isn’t as easy to do.
Learn 
About the One-Time Close Constuction Loan
After an introductory period with a low, fixed rate, an adjustable-rate mortgage has an interest rate that changes periodically through the life of the loan.
See Your Credit Scores From All 3 Bureaus
See Your Credit Scores From All 3 Bureaus
GET YOUR SCORES NOW!

FHA Loan Articles

When Buying with an FHA Loan, Don't Skip the Home Inspection

This wait isn’t easy when you've been shopping for a new home. But getting a home inspection is a crucial step, and not one you should consider skipping. Make sure you hire a reliable home inspector, wait for your inspection report, and watch out for these red flags. 

Is it the Right Time for an FHA Refinance?

With historically low interest rates, the mortgage industry has seen a sharp uptick in refinances. Taking advantage of the current market might be in your best interest and could lower your monthly payment significantly. Don’t forget that refinancing a mortgage comes with closing costs.

Let's Compare FHA Loans to VA, USDA, and Conventional Mortgages

Buying and financing a home is complicated and can become overwhelming. It's important for you to stay informed, and know what your options are. So, start with the basics and read about the four different mortgage types available before approaching a lender.

FHA Loans for Dreamers

With a new waiver in place, Dreamers have access to affordable FHA home loans designed for first-time homebuyers. There is no discrepancy in the FHA’s eligibility requirements when it comes to DACA status holders applying for an FHA-backed mortgage. They must meet all the same criteria.

Buying a House When Supply is Low

Buying a house is overwhelming to begin with. Make it a seller’s market, and buyers become even more nervous. Supply of real estate has been low for most of 2021, in part because of the Coronavirus pandemic and the historically low interest rates since 2019.

Buying a Home in 2021 - It's a Seller's Market

No matter what kind of market you’re in, it is always best to get pre-approved before going to shop for houses. The last thing you want is to go look at homes, find the one you love, then have to wait on an approval and lose the dream home to another buyer.


-- Find More Articles in the FHALoan Library --

FHALoan.com is not a government agency. We do not offer or have any affiliation with loan modification, foreclosure prevention, payday loan, or short term loan services. Neither FHALoan.com nor its advertisers charge a fee or require anything other than a submission of qualifying information for comparison shopping ads. We do not ask users to surrender or transfer title. We do not ask users to bypass their lender. We encourage users to contact their lawyers, credit counselors, lenders, and housing counselors.

SecureRights Advertiser Contact Information