FHA 7 year ARM: Federal Housing Administration 7 Year Adjustable Rate Mortgage
What is an FHA 7 year ARM?
The FHA 7 year ARM is a hybrid mortgage that is guaranteed by the Federal Housing Authority. It is deemed a “hybrid” mortgage because it has a fixed interest rate in the beginning for 7 years and then switches to a variable interest rate. As with all adjustable rate mortgages (ARMS) the rate is composed of an index rate and the lender's margins. The index is the cost of borrowing from the market, the margin is determined at the lender's discretion.
As it is insured by the FHA, the 7-year ARM FHA mortgage can only use 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 1-year London Interbank Offered Rate (LIBOR)
As with all ARMs, the 7-year ARM FHA mortgage can have caps, but according to the FHA they may only increase by two percentage points annually after the initial fixed interest rate period, and six percentage points over the life of the Mortgage.
7 year ARM FHA mortgages are attractive for their low-interest rates. The ARM nature of the loan means that the borrower is taking on the risk of rising interest rates in the future, therefore they deserve lower rates. Furthermore, the FHA insures the loan. This means that if the borrower fails to pay off the loan then the FHA will pay it off for them. Ultimately, the lender has low risk on the 7-year ARM FHA mortgage and so will be willing to accept lower a margin on the loan.