Features of How it Works
The Key to this program is that the lender is able to assist low to moderate-income families get into a home by keeping costs such as a down payment lower. Under an FHA loan individuals who have previously been denied or did not meet conventional loan requirements may be able to qualify. Adjustable Rate Mortgages help when interest rates are high by keeping the initial interest rate on a mortgage low this in turn allows borrowers to qualify for the financing they may need. With an adjustable rate mortgage your interest rate and monthly principal and interest payments will remain the same for an initial period of 5, 7, or 10 years, after that is will adjust annually.
Most of the ARM loans issued today are “hybrid” loans that start off with a fixed interest rate for an allotted amount of time. An example of this would be a FHA 5-year adjustable mortgage. In this loan the mortgage would be fixed or stable for the first five years, then after that it will start to be adjusted each year. The Section 251 Adjustable Rate Mortgage program states the maximum fluctuation of your interest rate in any year cannot exceed 1 percentage point. The most common types of loans are 3-year, 5-year, and 7-year. The number of years corresponds with the length of the fixed-rate term. A few things to know is that loans are available in a variety of longer terms and an interest rate cap is set that will limit how high your interest rate can go.
The table below describes the annual interest rate adjustment and interest rate cap over the life of the five types of Adjustable Rate Mortgage (ARM) loans.
| When the ARM is initially at a fixed interest rate for… | Then the annual interest rate adjustment, after the initial fixed interest rate period, is… | And the interest rate cap over the life of the loan is… |
| · 1 year · 3 years · 5 years |
One percentage point | Five percentage points. |
| · 5 years · 7 years · 10 years |
Two percentage points | Six percentage points |
Benefits
An FHA ARM is at its simplistic definition an adjustable home loan that has been insured by the federal government and there are several benefits to consider with shopping for loans. The number one benefit of using an FHA adjustable-rate mortgage is that most likely you can get a lower interest rate and lower payment, when compared to a fixed-rate loan. While the following is true it is important to consider that the lower rate is only during the initial stage. This is the primary reason people choose an adjustable mortgage, to save money by locking in a lower interest rate. The interest rate cap limits the maximum amount your P&I payment may increase at each interest rate adjustment and over the life of the loan. Also they may provide flexibility if you expect future income and growth or it you plan to move or refinance within a few years.
Considerations
Monthly principal and interest payments may increase when the interest rate adjusts. Your monthly principal and interest payments may change every year after the initial fixed period it over. The adjustable loan option is only beneficial if you are able to secure a lower rate during the first term of the loan. What is also worth noting is you choose not to refinance or sell the property of interest before the fixed-rate term expires, you may also step into the uncertainty of acquiring an adjustable interest rate. Monthly payments could possibly start to grow yearly until the loan is payed off. An adjustable-fixed rate could be a great opportunity for certain situations, FHA mortgages are also available in fixed terms that could benefit the borrower.
