FHA 5/1 ARM: FHA 5/1 Adjustable Rate Mortgage in Home Loans
FHA 5/1 ARM Basics
What is a FHA 5/1 ARM?
A FHA 5/1 ARM is a kind of hybrid mortgage in which interest rates remain fixed for a 5-year period, but can then increase after that due to changes in market interest rates. Unlike regular ARMs, an FHA 5/1 ARM is insured by the government, which can give you some serious benefits.
How Fast Can My Interest Rate Increase on a FHA 5/1 ARM?
On an FHA 5/1 ARM, your rate can be adjusted once a year after the conclusion of the 5-year fixed interest period. If you’re really lucky, they’ll lower it -- but in other cases, it might get bumped up. But how much can your rate increase during each of those adjustments?
Section 251, the FHA’s adjustable rate mortgage program, is specifically designed to help low- and middle-income families buy (and keep) their first home -- and to do so, they’ve introduced some safeguards that can help keep your mortgage payments from skyrocketing.
FHA 5/1 ARMs can either be capped at a 1% or 2% maximum interest rate increase during any one year. And over the period of your entire loan, you can’t be charged more than 5% or 6% more than your initial rate, depending on which kind of loan you choose.
What’s the Minimum Down Payment on an FHA 5/1 ARM?
Much like other FHA programs, the minimum downpayment on an FHA 5/1 ARM is 3.5%. That means the government will insure a loan for 96.5% of your home’s value. Pretty sweet, right?
When will I know if my interest rate is increasing on a FHA 5/1 ARM?
Under the FHA’s Section 251 program, you’re required to be given a 25-day notice before any increases are made to your monthly mortgage payment.
How Can I Refinance a FHA 5/1 ARM?
Since a lot of people get an FHA 5/1 ARM with the intention of refinancing the mortgage later (usually after the 5-year fixed rate period is over), it can pay to know your options. Fortunately, since you have a government insured mortgage under the Section 251 program, you can pretty much do a streamline refinance to a fixed-rate mortgage anytime you want.
What’s a streamline refinance? Well, it’s smart of you to ask. A streamline refinance is an easier way to refinance your FHA-insured loan, as it requires a lot less in terms of credit checks and underwriting (whew!). To get an streamline refinance, you’ll need be current on your mortgage, meaning you haven’t missed any payments. Plus, the refinance needs to result in a “net tangible benefit” to the borrower. That means the government is trying to make sure you don’t dig yourself deeper into a financial hole just by refinancing your home -- and that’s a good thing.
How do Closing Costs and Title Insurance Work on a FHA 5/1 ARM?
Well, just like any mortgage, you’ll still need to pay closing costs and title insurance-- but, since your mortgage is government insured, you might not have to pay them upfront. In addition to helping make sure your rates don’t climb too fast (and helping you work with a small down payment), the Section 251 program allows homebuyers to roll a lot of the initial closing costs into the mortgage itself. While doing that will increase your potential monthly payments, it could prevent a hassle upfront.
But, it’s important that not everything can be financed and rolled into a mortgage; for example, the FHA does require that the homebuyer initially pay for the home’s appraisal and the home’s title search. When it comes to your required FHA mortgage insurance, things are little more complex: while the FHA does allow you to finance your upfront insurance premium by rolling it into your mortgage, it won’t allow you to finance the monthly premiums. These are simply added to the mortgage payment itself.