FHA 7/1 ARM: FHA 7/1 Adjustable Rate Mortgage in Home Loans
FHA 7/1 ARM Basics
What is a FHA 7/1 ARM?
An FHA 7/1 ARM is a kind of hybrid home loan that’s insured by the Federal Housing Administration (FHA). If you get a FHA 7/1 ARM, your interest rate will be fixed for the first seven years of the loan, and can then be adjusted afterward when the variable interest rate portion of the loan begins. Like other ARMs, FHA 7/1 ARM variable interest rates are based on a index rate -- which is usually the rate at which banks in a certain area lend money to each other.
What indexes can an FHA 7/1 ARM be based on?
Because FHA 7/1 ARMs are insured by the government, there are only two approved indexes on which an FHA ARM loan can be based: the Constant Maturity Treasury (CMT) index, which is based on “the weekly average yield of U.S. Treasury securities, adjusted to a constant maturity of one year,” or the 1-year LIBOR rate. LIBOR stands for London Interbank Offered Rate, and it’s basically the rate at which different banks in England lend each other money.
Remember, you won’t be charged interest based on this rate until after the fixed interest period of your loan is over.
Who benefits from an FHA 7/1 ARM?
When people take out a hybrid ARM loan, they’re usually doing so to save money upfront -- either because they think they’ll have more income when the fixed period of the loan ends, or because they want to sell or refinance their home at the end of the fixed period.
Unlike with traditional ARMs, if you want to get an FHA ARM, you may only need to put 3.5% down (as long as you have great credit). While that might help you if you don’t have much money saved up, it doesn’t give you much equity in your home to fall back on if your home somehow decreases in value.
How often can my rates increase on an FHA 7/1 ARM?
On an FHA 7/1 ARM, your rates can be adjusted once a year. While this usually means your rates will go up, you could get super lucky and see your rates fall.
What is the maximum interest I can be charged on an FHA 7/1 ARM?
Like other ARMs, FHA ARMs have two kinds of caps or interest rate limits. These are the lifetime (or life-of-loan) cap and the periodic cap. A lifetime cap limits the highest amount you can be charged on a loan to a specific percent above your initial interest rate. FHA 7/1 ARMs have a lifetime cap of 6%, so, for example, if your loan started at 3%, it could never go higher than 9%.
In comparison, periodic caps limit the amount your interest rate can increase during each adjustment period. FHA ARMs have a maximum periodic cap of 2%, so even if the index on which your loan is based increases by 3% during an adjustment period, your interest rate will only increase 2% during that same period.