Adjustable Rate Loans are loans in which the interest rate will possibly change at some future date.
The FHA hybrid adjustable rate mortgage loan is one of the best adjustable rate mortgages currently available. It is available 1-4 unit owner-occupied principal residences (i.e. townhouse, and PUDs.) and for loans to be insured under sections 203(b) (single-family mortgage insurance), 203(h)(disaster victims), and 234(c)(mortgage insurance on condominium units).
Highlights of the New Program
In addition to 1-year ARMs, under this rule change, FHA may insure ARMs on single-family properties that have interest rates that are fixed for the first three years, five years, seven years or ten years of the mortgage term and adjusted annually thereafter. The 1-, 3-year and 5-year ARMs allow a one percentage point annual interest rate adjustment up or down after the initial fixed interest rate period and a five percentage point interest rate cap over the life of the loan. The 7-year and 10-year ARMs allow a two percentage point annual interest rate adjustment after the initial fixed interest rate period and six percentage point interest rate cap over the life of the loan.
Be careful as FHA hybrid ARMs also exist with lender options to increase the margin to 2.75% and to also apply annual caps of 2/6 or 2 percent increase or decrease per year and six percent over the start rate over the full term. These options for worse case caps are available in conjunction with a slightly lower start rate on the hybrid ARMs. This could be good or bad depending on how long you will keep the loan.
Borrowers choosing the 1-year ARM must qualify for payments based on the contract or initial rate plus one percentage point (1%). This only applies to the 1-year ARMs where the loan to value (LTV) is 95.00 percent or greater. Borrowers choosing the 3-, 5-, 7- or 10-year ARMs are to be qualified at the entry level (note) rate (i.e., there is no requirement to underwrite at once percentage point above the note rate as there is for 1-year ARMs).
FHA's adjustable rate mortgage is based on the economic indicator index called the 1-Yr. T-Bill. You can find the current T-Bill rate on many websites like HSH Associates or in the Wall Street Journal.
Index + Margin = Fully Indexed Rate
(current 1Yr. T-Bill Rate) + (percentage, usually 2.25%) = Interest Rate (apply 1% cap (+) or (-).)
NOTE: as of 9/14/11 the CMT 1Yr. T-Bill Rate = 0.19%
So, 0.19% + 2.25% = 2.44% (Interest Rate)
Other ARMs are being offered through Fannie Mae, Freddie Mac and the extremely unpopular Sub-Prime programs. Fannie and Freddie ARMs typically offer 3-, 5-, 7-, 10-year initial fixed rate periods. These products also have a much higher margin of 2.75 to 3.00 percent margin values in combination with 2/6 caps (i.e. two percentage point adjustments each year and a term cap of six percentage points over the term of the loan) which are much more aggressive than the FHA loan terms.
Sub-Prime ARM programs typically only offered a 2- and 3-year fixed rate period. During the 2- and 3-year initial period you could also include the option to ONLY pay interest. These products also had adjustment caps of 5/5/9 with a margin of 5.75-6.00 percent. This basically means that after the initial fixed rate period the rate could increase up to five percentage points each year and nine percentage points above the start rate over the life of the loan. Considering the fact that many choose to pay interest only, after the initial fixed rate period of 2- or 3-years the loan also at the same time as it's adjustment would also become full principal and interest. THIS is why so many homeowners lost their homes due to outrageous upwards adjustments which nobody expected or could afford.
The FHA hybrid ARMs are a much more stable product and can be used for short term financial relief especially when utilized in combination with a purchase or Streamline refinance. At some point after the first 6 months of making your first payment on an FHA hybrid ARM, you have an option to Streamline refinance to change the terms to fixed at very little costs and qualifying is simple. Currently, you must have at least a 620 fico, have made the previous 12 months payments within 30 days of the due date and you must be able to reduce your principal + interest + mortgage insurance payment total by at least 5%. Given that FHA has an available refi option, it really is a great product for the average homeowner to, for a period of time, reduce their payments with a lot of upside risks.
For more information or to Apply for your FHA Hybrid ARM today!
