Over the past decade, the use of an adjustable rate mortgage or ARM has become less popular with home buyers. This is often related to a misunderstanding of the ARM and issues that occurred in the mortgage crisis.
In fact, the FHA offers an adjustable rate mortgage that is a great option for many home buyers to consider. An FHA adjustable rate mortgage can be used strategically to keep monthly payments low and to also provide for options for refinancing through the program.
The FHA adjustable rate mortgage, as with all other ARMs, is a set rate for the first period of time stipulated in the loan. This set rate or the initial interest rate is lower than those offered for a fixed rate loan. This set rate period may be 1, 3, 5, 7 or 10 years, after which point the rates will adjust on a pre-set schedule outlined in the mortgage.
This is offered at a lower rate as the lender after the initial low rate period is up, will adjust the rate to match the movement of the current interest rates at that time. However, with the FHA adjustable rate mortgage, there are two types of caps. One is a cap that limits the annual increase and the second cap limits the increase over the life of the loan.
The shorter FHA ARM products will typically have annual caps of 1% and lifetime caps of 5%. The longer 7 to 10 year ARMS will have annual adjustments limited to 2% for a total of 6% over the term of the loan.
Utilizing the set lower rate of the ARM can help homeowners to qualify for a loan or refinance, to lock in low rates and sell before the end of the set rate or to buy a home early when increases in income are anticipated in the future.
If you are considering an FHA adjustable rate mortgage, give our lending experts a call at Guaranteed Rate. Additional details can also be found at www.guaranteedrate.com/home-loans/adjustable-rate-mortgage-arm on this mortgage option.