This article looks at the advantages and disadvantages, as well as the various types of FHA adjustable rate mortgages. An ARM home loan isn’t for everyone, but under certain circumstances there can be some advantages to a variable interest rate. Before discussing the pros and cons of an adjustable rate mortgage, it’s important to understand what an ARM home loan entails.
What is an Adjustable Rate Mortgage?
An adjustable rate mortgage or ARM is an interest rate that will fluctuate overtime With an FHA home loan, there are certain protections put into place that puts limits or caps on the ARM interest rate. With an adjustable rate mortgage, the interest rate can generally increase yearly (or several years at a time) based on the type of loan. The FHA variable interest rate also comes with a maximum cap over the life of the loan.
Advantage of an Adjustable vs. Fixed Rate Mortgage
The more common fixed rate mortgage has a constant interest rate over the life of the loan. The most common home loan is a 30-year term, although other terms are available. The main advantage of an adjustable vs. a fixed rate mortgage is an ARM will have a lower interest rate in the early stages of the loan. An adjustable rate mortgage has certain advantages for homeowners that:
- will stay in the home for a short period of time
- will realize an increased income in the near future
- can’t afford the payment of a fixed rate mortgage
If the homeowner plans on selling the home with two to three years, before the interest rate increases, an ARM would be a good option. For a homeowner that will realize an increase in income within two to three years and can’t afford the payments on a fixed rate mortgage, an ARM may be a good option.
For the homeowner that can’t qualify for a fixed rate mortgage for a home that fits their needs, an adjustable rate mortgage may be an option. If the homeowner is on a tight budget and/or is unsure of future income earnings, an ARM loan should be carefully considered. If the rate increases to a level where the family is struggling to make the monthly payment, they run the risk of foreclosure.
Advantages of a Fixed Rate Mortgage
The biggest advantage to a fixed rate mortgage is the monthly payment never changes over the life of the loan. An adjustable rate mortgage can be unpredictable. An FHA ARM can have a maximum cap of 5% or 6% above the initial interest rate, depending on the terms. For example if the initial interest rate is 3%, the interest rate could go as high as 9%. With this example the monthly payment could almost triple over the life of the loan.
There are various types of FHA insured mortgages. Always consider all the advantages and disadvantages before choosing a home loan. Veterans of the armed services should also consider a VA home loan.
Source:
hud.gov
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James Clausen - Clausen received a Bachelors Degree in Business Administration in Automotive Management and Marketing at Northwood University, graduating ...
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