FHA 5/1 ARM: Federal Housing Administration 5/1 Adjustable Rate Mortgage
What is the FHA 5/1 ARM?
A 5-year ARM FHA mortgage is a loan with a fixed and variable interest rate that is guaranteed by the Federal Housing Authority (FHA). The loan is a hybrid adjustable-rate mortgage (ARM): it starts out with a fixed interest rate for the first five years, then the rate becomes variable. The 5/1 ARM loan comes with a guarantee to the lender that the FHA will pay it off if the borrower fails to pay.
The 5-year ARM FHA loan is insured by the FHA, so it comes with FHA-stipulated provisions. For a 5-year ARM FHA mortgage, the interest may only follow the following indexes:
- The Constant Maturity Treasury (CMT) index (weekly average yield of U.S. Treasury securities, adjusted to a constant maturity of one year)
- The one-year London Interbank Offered Rate (LIBOR)
The FHA 5/1 ARM mortgage also has conditions for the interest rate cap:
- It may either allow for increases of one percentage point annually and five percentage points over the life of the mortgage
- it increases by two percentage points annually, and six points over the life of the mortgage.
5-year ARM FHA mortgages are designed for first-time home buyers, home buyers who might want to refinance soon, or home buyers who plan to move out within 10 years. This is mostly because the interest rate payments are initially cheaper than that of a fixed interest rate, so the borrower can make savings before the reset.