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FHA ARM |
FHA ARM refers to the adjustable rate mortgage program available at an FHA-approved lender. Unlike a fixed rate loan, an ARM has an interest rate that never remains static after the initial few years of a fixed-rate period have passed. Though the risk factor is greater, it may be a better option in certain situation. For example, when you expect relocation to a new place or an increase in earnings in near future or when the prevailing rate for a fixed loan is too high to afford.
FHA ARM Loans
There are four components in an ARM loan. These include an index, a margin, an adjustment cap structure and an initial interest rate period. An ARM option like 5 1 means that the period of fixed rate is 5 years after which the rate will be subject to an index and is adjusted annually.
The margin, which is added to the index during adjustment calculation, varies from one lender to another. Shop around to see who is offering the lowest margin on an FHA adjustable rate mortgage. Margin disclosure is mandatory for the lender at the time of making a loan.
The index can be either the Constant Maturity Treasury (CMT) index or London Interbank Offered Rate (LIBOR). The rates are adjusted according to the fluctuation in a chosen index, but these cannot go beyond the adjustment caps fixed by the Federal Housing Administration.
FHA ARM Program
The adjustment caps provide a protection against large upswing in interest rates. FHA offers two kinds of caps – annual and life of the loan. The annual cap restricts the change in a given year whereas the life-of-the-loan cap defines an upper and lower limit of rate change for the life of the loan. Based on the adjustment caps, FHA ARM Loans can be categorized into two groups.
The first group of loan programs offers annual caps of one percentage point and life-of-the-loan caps of five percentage points. The standard 1-year ARM and 3-year hybrid ARM come under this group. The second group of loan programs has annual caps of two percentage points and life-of-the-loan caps of six percentage points. The ARM programs under this category include 5-, 7-, and 10-year hybrid loans.
Use an online calculator to get an idea of the cost involved in obtaining an FHA ARM loan. For more information, visit the official website of the US Department of Housing and Urban Development.
Website: www.hud.gov
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