FHA stands for the Federal Housing Administration, which is a federal agency of the U.S. government that provides mortgages specifically geared to help Americans become homeowners. These mortgages are similar to the mortgages offered by traditional lenders, except that FHA mortgages tend to have lower interest rates and are backed or insured by the federal government. FHA rates include fixed, adjustable and fixed-to-adjustable rate mortgage products.
When it comes to fixed rate mortgage rates, the FHA rates come in two different options. Borrowers can choose from a 30-year fixed rate mortgage, which means the mortgage rate remains for the same for the 30 years the mortgage is in existence. The second option is a 15-year fixed rate mortgage, which fixes the interest rate for the entire 15 years of the mortgage.
FHA rates also include adjustable rate mortgages. Generally, these mortgages have interest rates that can change on an annual basis. So, each year, when the interest rate is due to adjust, the new rate is determined. The adjustable rate is configured by adding the index on which the mortgage is based, such as the prime rate, plus a margin. The margin is set at the beginning of the mortgage and never changes.
A third option for FHA rates is a hybrid of the fixed rate and adjustable rate mortgage, which is a fixed-to-adjustable rate mortgage. These types of mortgages have an interest rate that is fixed for a certain number of years, such as the first three, five or 10 years of the mortgage. After this fixed rate period, the mortgage goes to an adjustable rate mortgage, changing once a year for the remaining term of the mortgage, which is typically 30 years.
For example, a 3/1 ARM, for example, has a fixed interest rate for the first three years of the mortgage. The one indicates that the adjustment period is once a year. The fixed rate term on the mortgage is three years. The remaining 27 years of the mortgage is on an adjustable rate basis.
Finally, the FHA caps the amount of a mortgage that it will loan money. For example, if the cap is $275,000 US Dollars (USD), then the FHA interest rates only apply to mortgage amounts that are at or below this amount. Any mortgage amounts above the maximum limit are considered to be “jumbo rates” and the FHA does not offer mortgages for these loan amounts.