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Because people’s financing needs come in all shapes and sizes, there are a lot of loan products available. And depending on the buyer and current interest rates, some loan types make more sense than others.
When intending to stay in their home for a long time, most people will consider a 30-year fixed-rate mortgage as the best option when interest rates are low. But did you know that an FHA 5-year ARM loan may be an attractive financial choice in some cases?
Let’s start with the definitions for each of the loan types we’re talking about, discuss the advantages of an FHA 5-year ARM, and then get into a sample comparison:
Adjustable Rate Mortgage (ARM). The interest rate on an ARM is not fixed for the life of the loan. This mortgage adjusts periodically based on an index that changes with market conditions. The rate of interest is the sum of the index plus a margin. Most ARMs have periodic interest rate and payment caps, as well as a life cap.
5-Year ARM. The “5” in the 5-year ARM is the length
of time that the interest rate is fixed. After that, during years 6-30, the rate is reset each year, and the monthly loan payment is recalculated.
FHA Loan. FHA loans are mortgages that are insured by the Federal Housing Authority (FHA). The FHA has recently enhanced its loan program to better meet home buyer's needs with higher loan limits, competitive interest rates, and more flexible credit standards.
Conventional 30-Year Fixed-Rate Mortgage (FRM). A mortgage in which the interest rate is fixed and does not change during the entire life of the loan. A conventional mortgage is not insured or guaranteed by the federal government.
Why an FHA 5-Year ARM and why now?
- Rates are at or near historical lows for FHA 5-year ARMs
- FHA has low down payment requirements
- Interest rate is fixed for the first five years and then cannot increase more than 1 percent per year thereafter
- Interest rate cannot increase more than 5 percent above the initial rate, ever
- Ideal for buyers who expect to relocate within the foreseeable future
FHA 5-Year ARM