December 8, 2022

Different Types of FHA Adjustable Rate Mortgages Offer Choices For Borrowers

An FHA adjustable rate mortgage (ARM) can offer borrowers the  benefit of a lower rate compared to a standard fixed rate mortgage.  The lower rates on FHA ARM mortgages, however, do present the borrower with the risk that the interest rate may rise when the ARM mortgage rate adjusts.

There are circumstances under which the decision to go with an FHA adjustable rate mortgage is easy to make.  For example, if the borrower expects to remain in the house for only a short period of time and before the ARM rate adjusts, an ARM mortgage would result in savings since the rate on FHA ARMs is lower than the FHA fixed mortgage rate.  Other times, the decision on whether to go with a fixed or adjustable rate mortgage becomes more complex and the benefits and risks must be carefully considered.  (See FHA Adjustable Mortgages Offer Benefits and Risks, for information on how to decide between a fixed or adjustable rate.)

An FHA adjustable rate mortgage will always have the potential risk that a borrower could see a substantial increase in both the interest rate and monthly mortgage payment.  In order to offset this risk, the FHA offers a variety of adjustable rate mortgage products that allows a borrower to select an option best suited for each borrower’s unique situation.

Some borrowers may be worried that they cannot take the risk of having the mortgage payment increase soon after they purchase a home.  Other common concerns of borrowers considering an FHA ARM are how much could my payments change each year and by how much could the interest rate increase over the life of the loan?

The FHA offers five different mortgage options under the adjustable rate mortgage program which offer different annual and lifetime caps and different adjustment periods.

All FHA adjustable rate mortgages offer “caps” which protect the borrower from a large increase in interest rates.  The cap is the maximum amount by which the interest rate can increase on an FHA ARM.  The two types of caps on an ARM are the 1) annual cap and 2) the lifetime cap.  The annual cap limits the amount by which the interest rate can go up or down for each year.  The lifetime cap limits the total amount by which the interest rate can change (up or down) for as long as the borrower has the mortgage ( life of the loan).

The 1 year adjustable rate FHA mortgage is known as a “standard ARM”.  The other four mortgage products offered by the FHA are called “hybrid ARM” mortgages and offer a rate that is fixed for the first 3, 5, 7 or 10 years, after which the rate will adjust annually.

The 1 year ARM and 3 year hybrid ARM both have annual caps of 1% and a life time cap of 5%.

The 5, 7 and 10 year hybrid ARMs all have annual caps of 2% and lifetime caps of 6%.

FHA Adjustable Rate Mortgages
Type Annual Cap Life of loan Cap
1 Year ARM 1% 5%
3 Year ARM 1% 5%
5 Year ARM 2% 6%
7 Year ARM 2% 6%
10 Year ARM 2% 6%