What is an FHA ARM? A guide for borrowers.

Core Insights - The article discusses the benefits of FHA adjustable-rate mortgages (ARMs), highlighting their accessibility for first-time homebuyers due to lower credit score and down payment requirements [1][18] - FHA ARMs offer a lower initial interest rate compared to fixed-rate FHA loans, making them attractive for borrowers who expect to refinance or sell before the adjustment period begins [11][20] Group 1: FHA ARM Structure - An FHA ARM combines government-backed FHA financing with adjustable-rate loan features, allowing for more flexible credit standards [2] - The interest rate structure includes a fixed introductory rate followed by annual adjustments based on an index, such as the one-year Constant Maturity Treasury (CMT) or the one-year LIBOR [3][12] - Lenders add a margin to the interest rate, which varies by lender, making it essential for borrowers to compare options [4] Group 2: FHA ARM Options - FHA ARMs come in various terms, such as 5/1, 7/1, and 10/1, where the first number indicates the introductory period and the second indicates the frequency of rate changes [6][10] - Built-in borrower protections include rate caps that limit how much the interest rate can increase or decrease after adjustments [7] Group 3: Financial Implications - The initial lower rates of FHA ARMs can lead to more manageable monthly payments, especially beneficial for first-time homebuyers [11][14] - For example, a 5-year FHA ARM with an initial rate of 5.25% can adjust annually after the introductory period, with a maximum increase of 1% per adjustment and a lifetime cap of 10.25% [8][9] Group 4: Suitability of FHA ARMs - FHA ARMs are particularly suitable for borrowers who plan to move or refinance before the adjustment period, allowing them to benefit from lower initial payments [13][20] - Recent graduates and professionals with higher future earning potential may find these loans advantageous as they can manage lower payments while their careers develop [14] Group 5: Considerations for Borrowers - Borrowers should understand the caps on interest rate adjustments and budget for potential increases after the introductory period [16][22] - It is advisable to shop around for different lenders as FHA ARM rates and margins can vary significantly [22]