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The Adjustable Rate Mortgage (ARM) program provides insurance for adjustable rate mortgages, used in conjunction with other widely used FHA single-family products—Mortgage Insurance for One- to Four-Family Homes, Single-Family Rehabilitation Mortgage Insurance, and Single-Family Mortgage Insurance for Condominium Units.
With FHA’s ARM loan, the initial interest rate and monthly payment are low, but these may change during the life of the loan. FHA uses 1-year Treasury Constant Maturities Index to determine interest rate changes. The maximum amount the interest rate may increase or decrease in any one year is 1 percentage point. Over the life of the loan, the maximum interest rate change is 5 percentage points from the initial rate.
In March, 2004, FHA added Hybrid ARMs to the loans FHA will insure. The Hybrid ARMs have fixed 3, 5, 7 and 10 year terms. The 1- and 3-year ARMs allow a one percentage point annual interest rate adjustment after the initial fixed interest rate period and a five percentage point interest rate cap over the life of the loan. Effective with Mortgagee Letter 05-14, The 5-year ARM joins the 7- and 10-year ARMs to allow a two percentage point annual interest rate adjustment after the initial fixed interest rate period and a six percentage point interest rate cap over the life of the loan. Lenders must disclose to the borrower the terms of the ARM at the time of loan application.