Understanding FHA adjustable rate mortgages

By Jason • April 27th, 2011

Interest rates on an ARM can change periodically. The initial interest rate of an ARM is usually lower than a fixed rate mortgage. An ARM may be a good option to consider if you plan to own your home for only a few years.

FHA loans require a minimum down payment and funds for closing may be a gift.  In Raleigh, the loan limit for an FHA loan is $295,000 and there are no income restrictions (It doesn’t matter how much you make.)

An ARM has four components: (1) an index, (2) a margin, (3) an interest rate cap structure, and (4) an initial interest rate period. When the initial interest rate period has expired, the new interest rate is calculated by adding a margin to the index. Your lender will disclose the margin at time of loan application (margins may vary from lender to lender, so it’s is a good idea to shop around for a low margin). As the index figure moves up or down, your interest rate will be adjusted accordingly. Acceptable index options on FHA insured ARM loan transactions are 1) the Constant Maturity Treasury (CMT) index (weekly average yield of U.S. Treasury securities, adjusted to a constant maturity of one year); or 2) the 1-year London Interbank Offered Rate (LIBOR). Increases or decreases in the interest rate will be limited by the interest rate cap structure of your loan.

Click For more information on ARMs on the HUD website

Jason has been actively selling real estate in Raleigh since 2000 and blogging since 2005.  .

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