What Is An Adjustable Rate Mortgage "ARM"
The FHA -Federal Housing Administration mortgage loan structured as an “ARM is a HUD mortgage that was specifically designed by the Federal Housing Administration for low and moderate income families who are trying to make their transition into home ownership. This program, which can be used in conjunction with other FHA programs, can help to keep initial interest rates and monthly mortgage payments to a minimum. Also known as Section 251, FHA’s Adjustable Rate Mortgage Program insures home buyers on loans with rates that may increase or decrease.
ARM's Help Homeowners When Rates Are High Or When Income Will Improve
How Does It Work?
By serving as an umbrella under which mortgage lenders have the confidence to offer loans to borrowers who may not meet the conventional loan requirements.
The FHA provides mortgage insurance that allows borrowers to qualify that may have been previously denied for a home loan by current conventional underwriting guidelines.
In addition, it protects the lenders against loan default on mortgages. This includes protection on mortgage loans on properties that include single-family, manufactured homes, multifamily properties, and some health-related facilities.
Through this FHA program and other mortgage insurance programs, the lender is able to help low and moderate-income families to purchase homes by helping the homebuyer keep the initial costs down.
A Variety Of FHA Loans That work
The most popular FHA loan is the Fixed-Rate 203 (b) loan. In addition to the 203b there are many other programs that are based on the FHA 203 (b) that have additional features to help home buyers.
The Adjustable Rate Mortgage “ARM” Program Section 251 provides insurance for Adjustable Rate Mortgages. Adjustable Rate Mortgages keep the initial interest rate on a mortgage low which allows borrowers to qualify for the financing they need.
The beauty of the Section 251 loan program is that it goes hand in hand with other FHA single family products such as
o Mortgage Insurance for One to Four Family Homes (Section 203(b))
o Single-Family Rehabilitation Mortgage Insurance (Section 203(k))
o Single-Family Mortgage Insurance for Condominium Units (Section 234(c))
While Section 251 program helps to keep mortgage interest rates and payments low they are still adjustable and can change over the life span of the loan. One upside is that the maximum amount of fluctuation in the interest rate cannot exceed 1 percentage point. Over the life of your loan, the interest rate cannot increase more than 5 percent from your initial rate.
The actual terms of the Adjustable Rate Mortgage, ARM will be disclosed to you when you apply for your mortgage. Should your interest rate increase, the lender will inform you at least 25 days before any changes to your monthly payment are made. Another benefit of the Section 251 program is that if you ever consider refinancing your Adjustable Rate Mortgage Loan you will be able to easily move into a Fixed Rate Mortgage at any time.
In addition to the adjustable rate aspect of the Section 251 loan it is very similar to an FHA insured single family loan. Because FHA having insurance allows home buyers to finance up to 96.5 percent of the value of their home. The down payment can be as little as 3.5 percent of the total value of the home.
The FHA also allows many of the closing costs involved in purchasing a home to be financed through your mortgage. The same rules apply for an Adjustable Rate Mortgage loan.
The out of pocket costs that you, as the potential homeowner, are responsible for are as follows; the down payment, appraisal and title search and any up front charges associated with your mortgage insurance premium? which may also be financed, and the monthly premiums that are added into your mortgage payment.
To better assist you, the FHA has set rules that limit the amount lenders can charge you in making a loan. The FHA ensures that the loan origination fees charged by the lender do not exceed one percent of the total amount of your mortgage less the mortgage insurance premium, if it is being financed through your loan. The goal is to best serve the low and moderate-income home buyers. The FHA also sets limits on the total dollar value of the mortgage loan. View the current established FHA loan limits. Please keep in mind that these figures vary over time and by place, depending on the cost of living and other factors. There are higher mortgage limits that exist for two to four family properties.
Important note that any person who can meet the cash investment, credit requirements, and monthly mortgage payment is eligible to apply for these types of loans, however the program is limited to owner occupants.
Any persons that is intending to occupy the purchased property as their principal place of residence are eligible to apply. CambridgeHomeLoan is eligible to help you through this process.
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