Adjustable rate mortgage loans historically were the home loan of choice when interest rates were relatively high. For example, if you bought a house say in 1987 you would find that fixed rates were available but they weren’t all that popular because a standard 30 year fixed rate was somewhere around 11.00%. That’s right, 11.00%. That’s why adjustable rate mortgages were the popular choice because they started out much lower than their fixed rate cousins. In today’s market, there is an abundance of fixed rate options called “hybrids” that are fixed for the first few years then change into an adjustable rate mortgage that can change once per year.
Two of the more popular hybrids are the 3/1 and 5/1 FHA adjustable rate mortgage. Borrowers can qualify for a slightly larger loan amount due to the lower starting rates compared to a fixed rate loan and is also advantageous if the buyers don’t intend to own the property for very long and would likely sell before the first or second adjustment. This particular strategy works very well. That said, is there any difference between a 3/1 or 5/1 FHA ARM?
Yes, but only slightly so. Because the initial fixed rate term is three instead of five years, borrowers can save money by selecting the shorter, three year initial term. Not a lot, but there is a difference. When first speaking with your loan officer, be sure and review all your loan options both fixed and adjustable. For those that are definitely or at least likely to own the property for several years, the hybrid option may not be the best choice but if a shorter stay is in the plans then comparing the difference in monthly payments between a 3/1 and 5/1 should be on your discussion list. For “short termers” a 3/1 over a 5/1 makes sense if the borrowers keep their initial closing costs low and refrain from paying discount points.
The best option for an FHA 3/1 ARM is coming to the closing table with the 3.5% down payment and very few closing costs. Your loan officer can prepare different rate and fee combinations to see which strategy makes sense for your situation but if you’re seriously considering either the 3/1 or 5/1 and your plans are to move or otherwise sell the property within three years then you might very well begin to lean toward the 3/1 and the lower payment it provides.