HUD issues interim rule for ARM eligibility mortgagepress.comHUD-insured, adjustable-rate mortgage, interest rates
The Federal Housing Administration is making available a new
HUD-insurable, adjustable rate mortgage (ARM). The rule allows the
HUD secretary to insure five-year hybrid ARMs with interest rates
adjustable by up to two percentage points annually. In addition,
the lifetime cap on annual interest rate adjustments for five-year
ARMs is increased to six percentage points. The FHA hopes that
these changes will make five-year ARMs more attractive to consumers
because lenders will be able to offer lower initial interest rates
than those offered for conventional 30-year fixed-rate
mortgages.
Section 251 of the National Housing Act limits the amount of
annual interest rate adjustments on ARMs insured by the FHA
depending upon the length of the initial fixed interest rate term.
Currently, five-year hybrid ARMs have a one percent limitation for
the annual interest rate adjustment. Mortgage lenders have
expressed to HUD that a one percent cap does not provide lenders
with sufficient interest rate flexibility to offer five-year ARMs
at an interest rate below the traditional 30-year fixed rate
mortgage. As a result, five-year ARMs are less attractive to both
lenders and borrowers because the appeal of ARM loans is based on
their lower initial interest rate. The one percent limitation also
weakens HUD's ability to offer mortgage insurance for different
types of ARM loans with initial interest rates lower than the
interest rates for conventional 30-year fixed-rate mortgages. By
increasing the percentage limitation to two percentage points,
lenders will have more flexibility when offering ARM loans and
consumers will be able to receive initial interest rates lower than
those offered for 30-year fixed-rate mortgages. The lifetime cap on
annual interest rate adjustments for five-year ARMs was increased
from five to six percent.
For more information, visit www.hud.gov.
