FHA Adjustable Rate Mortgage, is often the best route for consumers to go when refinancing their homes or purchasing a new home. This is particularly helpful for buyers looking to purchase a "step-up" or "starter" home, where they plan to live for 5 years or so. One of the main reasons an FHA Adjustable Rate Mortgage makes sense is the rate differential between a 30 Year Fixed FHA loan and the 5/1 ARM, which is generally .75% to 1%. On a $400,000 loan, this translates into savings of $180-$240 per month.
Many consumers hear FHA Adjustable Rate Mortgage and shudder at the thought of an ARM loan, given the recent spate of ARM's adjusting upward. But a closer look at the type of ARM an FHA Adjustable Rate Mortgage is, particularly the 5/1 ARM, gives some insight as to how relatively conservative the program actually is when compared to other ARM programs. Here is a quick primer on ARM loans and notes on where an FHA Adjustable Rate Mortgage stacks up:
Index: The index in which you have an adjustable rate mortgage plays a large part in how your rate can adjust, as the yield or interest rate is added to the margin to determine your new rate, subject to any Caps in place. Many mortgages have an index based on the 1 Year Treasury Bill, LIBOR (London Interbank Daily Offered Rate), or the COFI(Cost of Funds Index). The MTA is the Monthly Treasury Average over a given timeframe. An FHA Adjustable Rate Mortgage uses the 1 Year Treasury Bill(CMT) as the index.
Here are the approx. yields of many Market Indices for ARM Loans as of 9/30/2009:
Prime: 3.250%
1 Yr Libor 1.43%
1 Yr T-Bill 0.460%
11th Dist COFI 4.244%
12 Mth MAT .758%
Margin: The margin is a percentage that is added to your Index to determine your fully indexed rate. Many Prime ARM loans have margins ranging from 2.25% to 3.5%. Unfortunately, there are Subprime ARM loans with margins ranging from 4.25% to 9.25% or more. The ARM loans with high margins are the "toxic" ARM loans you read and hear about in the news all the time, because the loans adjust upward to the maximum of the caps each adjustment. An FHA Adjustable Rate Mortgage has a margin of just 2.25%, one of the lowest in the industry.
Caps: Caps refer to the maximum amount your new rate can adjust in a given period. Usually there is a First Adjustment Cap, a Subsequent Adjustment Period Cap, and a Lifetime Rate Cap. Caps of 2/2/6 would mean a rate could adjust as much as 2% in the first adjustment (regardless of the fully indexed rate), 2% any adjustment thereafter (regardless of the fully indexed rate), and 6% over the life of a loan (regardless of the fully indexed rate). Some loans may have a "floor" for adjustments as well, meaning that your rate may not decrease a certain amount from the initial rate. An FHA Adjustable Rate Mortgage has caps of just 1/1/5, again one of the lowest in the industry.
If you currently have an FHA Adjustable Rate Mortgage 5/1 ARM based on the 1 year Treasury Bill (.49%) with a margin of 2.75% and 1/1/5 Caps, well, you are in good shape! .49% (Index) + 2.75% (Margin) = 3.24% Fully Indexed. (You may have a floor in your adjustment).
All in all, an FHA Adjustable Rate Mortgage is a great option to consider depending on your current situation for either a purchase or refinance. The low index, margin, and caps make the adjustments easier in an inflationary market as well.
If you are considering refinancing, contact a mortgage professional who knows how to naviagte the FHA guidelines and pricing adjustments for various programs.
* Not a commitment to lend. Rates for illustrative purposes only. Other programs available. Equal Housing Lender. Licensed in CA,CO,CT,DE,FL,GA,MA, NJ, NY,PA,TX,SC,VA
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