FHA Adjustable Rate Mortgage
The Federal Housing Administration(FHA) was founded in the 1930’s to help the housing industry cope with the Depression era conditions. An FHA loan is insured by the federal government. If the borrower defaults, the government will compensate the lender. This means that lenders take on less risk.
Because FHA loans are federally insured, there are different rules than other mortgages. Home buyers can put less down on their purchase and there’s more flexibility in the calculations of payment and income ratios. It helps people who would not qualify for an ordinary mortgage become home owners.
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There are a variety of loans available under FHA programs. Some have fixed rates and some have adjustable rates. With a fixed-rate loan, the payment remains stable for the life of the loan. An adjustable rate changes over time. FHA insured loans have an introductory rate that is fixed for a period of time and after that the rate is recalculated annually. How much the rate can change in a given year is the annual cap and the maximum rate that can be charged is the life-of-the-loan cap. Both of these caps are all part of the loan contract.
The initial fixed-rate period can vary from one year to ten years. The longer fixed-rate periods are usually offset by higher annual caps. In other words, you pay more once the rate begins to float.
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When you are evaluating different types of loans think about your long-term financial goals. If you intend to stay in your home for a long time, a fixed rate loan might be the best option but if you intend to sell in a few years, the adjustable rate might make more sense.
FHA adjustable rate loans all use the same index. The loans are tied to changes in the Constant Maturity Treasury index. The weekly average yield of U.S. Treasury securities is adjusted to a constant maturity of one year to arrive at this index.
All FHA insured loans are administered by the U.S Department of Housing and Urban development. You can get more information about FHA loans and how to qualify for them from the HUD web site: www.hud.gov.
If you know about your options before you talk to a lender you’ll be better able to evaluate their offers. All lenders are not the same. Shop around and find the type of loan that will meet your needs before you sign on a mortgage. You’ll be living with that decision for a long time.
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