The FHA adjustable rate mortgage (or ARM) is different than the conventional or jumbo ARMs. It offers better features with lower adjustments than a conventional or jumbo ARM. It still has a fixed period of time that the interest rate will not change and can adjust periodically after the initial fixed period expires. These mortgages are also backed up by HUD.
Guidelines and Parameters
An ARM has two components—the first number represents how long the interest rate will remain fixed, or will not change for that period of time of the loan. The second number tells you the length of time and frequency the loan will adjust once the variable portion kicks in. FHA ARMs use predetermined caps and margins that work in concert with monetary fund indexes to establish the interest rate when the loan adjusts. FHA adjustment caps vary greatly when compared to Conventional or Jumbo loans as those caps and margins are usually much lower. Currently the FHA offers only one ARM type:
5/1 ARM: Your interest rate is set for 5 years then adjusts for 25 years.