FHA mortgages with adjustable rates: What you need to know

Why do people take out an FHA adjustable loan?

Adjustable rate mortgage graphicA fixed-rate mortgage has an interest rate that does not change over time. The length of the loan may vary from five to thirty years. Additionally, some lenders allow for a 40-year term. Regardless of the period, the monthly payment (principal and interest) will stay constant from the first payment to the last payment throughout the loan's life.

FHA adjustable rate mortgages, on the other hand, have an interest rate that “adjusts” or resets after a certain time period. Adjustable rate mortgages of one, three, five, seven, and 10 years are permitted by the FHA.

The interest rate on an FHA adjustable rate mortgage is fixed for a period of one, three, five, seven, or ten years. Following the initial first fixed rate period, the interest rate will be changed annually. These loans are sometimes referred to as hybrid mortgages for obvious reasons.

Interest Rate Adjustment

When the original interest rate term expires, the revised interest rate is determined by adding the margin and the index together.

An ARM has four components:
(1) a margin,
(2) an index,
(3) an initial interest rate period.
(4) an interest rate cap structure, and;

The index is typically:

House with a sold sign1) Secured Overnight Financing Rate (SOFR),or

2) Continuous maturity: The constant maturity of one year.
The Treasury index is the most often used benchmark for adjusting the interest rate on adjustable-rate mortgages. The value is generated from risk-free government-issued assets known as Treasuries, or

3) 11th District Cost of Funds Index (COFI): An index that shows how much the 11th Federal Home Loan Bank District pays for checking and savings accounts is called COFI. It shows how much the 11th District pays for these types of accounts on average.

Animated interest rate  To determine the new interest rate, the index, and margin are added together. But, just in case interest rates rise unexpectedly, there are annual and lifetime caps that supersede the index and margin calculation.

For example, if the initial interest rate was 4% at settlement, but after the fixed rate term, the margin, and index shot up to 8%? Ouch! In this example, the annual rate cap would kick in (4% + 1% = 5%).

  Annual Cap Lifetime Cap
1 and 3 year ARM's 1% 5%
5 year ARM's 1% 5%
7 and 10 year ARM's 2% 6%

The interest rate limit protects the borrower against a future rate change.

Rotating question markFrequently Asked Questions (FAQs)

Q. Are adjustable rate mortgages a good idea?
A. There is no one-size-fits-all answer to this question, as the appropriateness of adjustable rate mortgages will vary depending on the individual's financial situation and goals. However, in general, adjustable rate mortgages can be a good idea for borrowers who are comfortable with taking on some risk and who plan to stay in their home for a relatively short period of time.

Q. Do adjustable rate mortgages have a cap?
A. Yes, adjustable rate mortgages do have a cap. The cap is the maximum amount that the interest rate can increase or decrease in a given year. This helps protect the borrower from dramatic changes in their monthly payment.

Q. Do adjustable rate mortgages still exist?
A. Yes, adjustable rate mortgages (ARMs) still exist. An ARM is a type of mortgage where the interest rate is not fixed, but instead changes periodically based on a pre-determined formula. This can be a good option for people who expect to move or refinance within a few years, as it can save them money in the short-term.

Q. Do adjustable-rate mortgages ever go down
A. Yes, adjustable-rate mortgages (ARMs) can go down in rate. This usually happens when the initial fixed period of the ARM expires and the interest rate resets to a new, lower level. However, it's important to note that ARMs can also go up in rate, so it's important to carefully consider all the terms and conditions before deciding if an ARM is right for you.

Q. How does an adjustable rate mortgage work ?
A. An adjustable rate mortgage (ARM) is a type of mortgage in which the interest rate may change periodically, usually based on an index. The ARM loan starts with a lower interest rate than a fixed-rate mortgage, but the interest rate may go up or down, depending on the market conditions.

Q. is adjustable rate mortgage a good idea?
A. There is no simple answer to this question. Adjustable rate mortgages can be a good idea if you plan to stay in your home for a short period of time, or if you are comfortable with taking on more risk. However, they can also be a bad idea if interest rates rise significantly during the time you have the mortgage.

Q. What determines how frequently an interest rate adjusts in an adjustable rate mortgage ?
A. The frequency of rate adjustments on an adjustable rate mortgage is determined by a number of factors, including the terms of the loan, the current market interest rates, and the borrower's credit score. Most ARMs will have a fixed adjustment period, during which time the interest rate will not change. After that, the rate may adjust every month, every six months, or once a year.


In conclusion, FHA mortgages with adjustable rates can be a great option for some borrowers, but it's important to understand all of the risks and features involved before deciding if this type of loan is right for you. If you're thinking about an FHA adjustable rate mortgage, be sure to consult with a qualified lender or financial advisor to find out more about your specific situation and what the best option may be for you.