Does the FHA Offer Adjustable-Rate Mortgages (ARM)?

In addition to fixed-rate FHA loans, the Federal Housing Administration (FHA) offers adjustable-rate mortgages (ARM) with fixed-interest periods of 1-10 years, after which the interest rate is subject to change. 

Zillow research showed that ARMs rose in popularity in the first half of 2022 as home buyers hunted for ways to save money due to the higher interest rates. When interest rates are high, ARM loans are more attractive because they often come with a lower initial interest rate, which allows borrowers to qualify for the financing they need to purchase or refinance a home. 

What is an FHA adjustable-rate mortgage?

An FHA loan is a mortgage backed by the Federal Housing Administration. An FHA mortgage with an adjustable-rate means the home loan has an interest rate that changes after an initial fixed-rate period. While an FHA fixed-rate mortgage has an interest rate that remains the same for the life of the loan, FHA ARM loans have a fixed rate for an initial period of time and a variable rate once that initial period ends for the remaining loan term.

The interest rate fluctuates based on a preset index rate that’s outlined in your mortgage contract. The index rate is used as a baseline to set a margin for how much your rate can increase after the fixed period ends.

How do FHA ARM loans work?

An FHA ARM works similarly to other adjustable-rate mortgages. All ARMs have fixed rates at the beginning of the repayment period, after which variable rates are implemented. The fixed rate periods often vary based on the home loan program. On a FHA ARM, fixed rates can last 1, 3, 5, 7, or 10 years. The variable rate period starts immediately after the fixed rate period ends. 

Once the variable rate period on an ARM begins, interest rates adjust at predetermined intervals, usually once a year. ARMs come with annual and lifetime caps, which means lenders can’t raise your interest rate beyond a certain limit.

Types of FHA ARM loans

Qualifying borrowers can obtain one of the following types of FHA ARMs. Here’s how they differ from one another. 

1-Year Standard FHA ARM

The interest rate remains fixed for the first year. After the first year is up, the interest rate can increase by up to one percentage point every year and by no more than five percentage points over the life of the loan. 

3-Year Hybrid FHA ARM

The interest rate is fixed for the first three years. After the three years are up, the interest rate can increase by up to one percentage point every year and by no more than five percentage points over the life of the loan. 

5-Year Hybrid FHA ARM

The interest rate is fixed for the first five years. After the five years are up, the interest rate can increase by either:

• One percentage point every year and no more than five percentage points over the life of the loan, or 
• Two percentage points every year and no more than six percentage points over the life of the loan.

7-Year Hybrid FHA ARM

The interest rate is fixed for the first seven years. After the seven years are up, the interest rate can increase by up to two percentage points every year and by no more than six percentage points over the life of the loan.

10-Year Hybrid FHA ARM

The interest rate is fixed for the first ten years. After the ten years are up, the interest rate can increase by up to two percentage points every year and by no more than six percentage points over the life of the loan.

FHA ARM requirements

Borrowers applying for an FHA ARM must meet the same guidelines as borrowers pursuing a fixed-rate or variable-rate FHA home loan. FHA mortgages are reserved for the following types of borrowers and properties:

• Primary residences
• Properties that fall within FHA loan limits ($524,225 for most one unit properties in 2025)
• Borrowers with a credit score of 580 with a down payment of 3.5%, or credit score of 500-579 with a down payment of 10%
• Borrowers with debt-to-income (DTI) ratios of 43%, or less
• Borrowers with steady employment and income for the last two years

Pros and cons of FHA adjustable-rate mortgages 

Getting a FHA adjustable-rate mortgage comes with several benefits, but it also has a few drawbacks. Carefully consider the pros and cons of FHA ARMs, below.

Pros

• The fixed rate during the initial period of an ARM is usually lower than other fixed-rate loans. 
• The fixed-rate period can last as long as 10 years, providing you financial flexibility to accomplish other goals.
• Borrowers with lower credit scores and no credit history can purchase a home without having to raise or build their credit scores. 

Cons

• If the interest rate on a FHA ARM increases by a lot after the fixed-rate period ends, you may not be able to afford your monthly mortgage payments. 
• FHA loan limits are often lower than conventional loan limits, which means a FHA ARM might not cover the total cost of the home you’d like to purchase.
• Whether you pay 3.5% or 10% down, you’ll need to pay an upfront mortgage insurance premium (UFMIP) of 1.75% and an annual mortgage insurance premium (MIP) between 0.15% and 0.75%. 

Should I get a FHA adjustable-rate mortgage?

An FHA ARM is ideal for borrowers who plan to sell, refinance, or pay off their loan before the fixed-rate period ends.

If mortgage rates are expected to fall in the future, you may choose an FHA ARM in hopes of securing a lower rate after the fixed-rate period ends to keep your payments low. Of course, interest rates are difficult to predict. Keep in mind that rates can just as easily rise, increasing your interest rate and monthly payments in the future.

Below are 5 scenarios in which getting a FHA ARM makes sense.

You plan to refinance 

Borrowers who plan to refinance their FHA ARM before their initial rate term ends can avoid a sudden spike in their monthly mortgage payments. Depending on your financial situation, you can refinance into another ARM or switch to a fixed-rate loan. 

You plan to sell your home soon

If you don’t plan to stay in the home you’re buying, getting a FHA ARM could be beneficial. You’ll build equity in the home while paying a low, fixed rate. Selling your home before the interest rate adjusts might allow you to save significantly compared to a 30-year fixed-rate mortgage. 

You plan to pay off your mortgage early

Borrowers who plan to pay off their mortgages before the fixed rate period ends don’t have to worry about higher interest payments. As long as there is no prepayment penalty on your FHA ARM, you could potentially save thousands in interest. 

You can afford a higher interest rate

Borrowers who can expect to make more money in the future might be able to afford a higher interest rate. Ask your lender about the maximum potential monthly payment. If that amount fits within your budget, an FHA ARM loan might make sense for you.

You want to buy a home with a low credit score

If buying a home is your priority, you might not want to wait until your credit score meets the requirements for a conventional loan. FHA ARMs typically have more flexible credit criteria, making them a practical option for purchasing a home now instead of delaying until you meet conventional loan requirements.

*Zillow Home Loans; An equal housing lender. NMLS #10287