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Although the FHA is more typically known for it fixed interest rate mortgages, homeowners can also structure their home loans with adjustable rate financing options. FHA ARMs are also available to existing homeowners looking to refinance with a FHA mortgage lender.

FHA Home Loans Not Limited To Fixed Interest Rate Mortgages

Most Common FHA Home Loan Is the Fixed Interest Rate Mortgage

Aside from low down payments and favorable credit guidelines, FHA home loans have also been quite known for their plain vanilla fixed interest rate mortgages. At a time when so many other types of mortgages seemed to have failed, fixed rate FHA home loans have grown in popularity as borrowers shy away from more risky alternatives. But before anyone criticizes FHA for their lack of variety just yet, homeowners should know that FHA makes adjustable rate mortgages just as available.

Adjustable Rate Mortgages Still Available with FHA

Whether buying your first home or refinancing into an FHA home loan, FHA offers both fixed-rate mortgages and ARMs.FHA lenders feature the traditional 1-year ARM plus four other "hybrid" mortgages. The 1-year and 3-year hybrid ARMs carry annual interest rate caps of 1%, and a lifetime cap of 5%. This means the interest rate can increase by 1% at most each year and 5% at most during the life of the loan. FHA 5,7, and 10-year ARMs carry annual interest rate caps of 2% and lifetime caps of 6%.

Compared to other conventional ARM products, these FHA mortgages are much more favorable as they implement stricter interest rate limitations and no "gotcha" clauses. More specifically, FHA products do not include restrictive prepayment penalties which result in huge fees for early repayment. This way, if a homeowner needs to refinance out of his or her ARM, they will not be penalized by the mortgage lender for paying off a loan early.

Understanding the Different Parts of an FHA ARM

An adjustable rate FHA home loan has four major components: an index, a margin, interest rate cap structure, and the initial interest rate period. When the initial interest rate period ends, the FHA home loan is allowed to fluctuate within the limitations of the interest rate cap structure. Margins can vary among different FHA mortgage lenders, but the index will affect all FHA home loans. Once a borrower is beyond the introductory interest rate period, his or her interest rate will fluctuate according to the index and margin set by the lender. Typical indexes used by FHA lenders include the Constant Maturity Treasury (CMT) and the 1-year London Interbank Offered Rate (LIBOR). When comparing mortgage rates between different FHA lenders, it's important to determine how your ARM will be structured and which index it will follow.

Why Choose An Adjustable Rate Mortgage?

Adjustable rate home loans can be quite attractive, and are a sensible choice as a short-term mortgage strategy. For example, if you plan to move or sell in a few years, adjustable rate mortgages can make perfect sense. But with current mortgage rates near historic lows, homeowners tend to avoid ARMs as there becomes less incentive to take risks. While the fixed interest rate counterpart will be initially more expensive than an ARM, the long term stability is often more promising than the possibility of future rate drops. Since ARMs are typically reserved for select groups of homeowners, an FHA mortgage lender, or broker, can help you evaluate possible loan options and determine which alternative might work out best for you.


Heindrick So
Heindrick So is a mortgage consultant at a local Bay Area Real Estate Brokerage--specializing in residential wholesale lending. Heindrick frequently contributes to various finance columns, ranging from home loans and mortgages, debt management, and other personal finance topics.