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Is An FHA Adjustable Rate Mortgage An Interest Only Loan?

By Kevin Landis

The FHA Adjustable Rate Mortgage

An FHA adjustable rate mortgage is a popular choice for homebuyers who expect to own their home for only a few years, or who are expecting an increase in salary. Adjustable rate mortgages (ARMs) are designed with interest rates that fluctuate with the economy. Each year, your FHA adjustable rate mortgage can be adjusted a maximum of 1% (as compared to 2% for other ARMs). Lifetime loan adjustments are capped at 5%. So, for example, the loan could start at an interest rate of 5% and potentially increase to as much as 10% within five years of the purchase. Another factor to note is that unlike the conventional ARM, the FHA adjustable rate mortgage does not offer a “teaser” interest rate for the first year. This may mean a higher first-year interest rate, but it also means that the first adjustment will not be as large.

What Is An Interest-Only Loan?

An interest-only loan is somewhat like renting a house. For a given interest-only period (usually five to ten years on a 30-year loan), borrowers make payments only toward the interest, not toward the principal. As a result, at the end of this period, they have no equity in the home. However, the significantly lower payments required by an interest-only loan are an attractive feature to those who are expecting significant increases in salary over the next five to ten years of their careers. For such borrowers, an interest-only loan would enable them to obtain a mortgage which they ordinarily could not afford or would not qualify for. At the end of the interest-only period of the loan, the mortgage is then amortized, or converted to a principal and interest loan.

Is The FHA Adjustable Rate Mortgage An Interest-Only Loan?

The FHA does not offer interest-only loans. The FHA adjustable rate mortgage is a principal and interest loan.

Related posts:

1. Is An FHA Adjustable Rate Mortgage An Interest Only Loan?
2. What is a 2/28 Adjustable Rate Mortgage?
3. How Soon Can I Refinance An Adjustable Rate Mortgage?
4. Does Adjustable Rate Mortgage Have A Fixed Rate?
5. Which Is A Better Choice A Fixed Or Adjustable Mortgage Loan?