The Section 251 home loan program from the Federal Housing Administration (FHA) was created to assist low-income families and individuals during the homebuying process. Adjustable-rate mortgage insurance for these loans allows lenders to provide loans to those who may not have any other financing options.
With an adjustable-rate mortgage or ARM, the amount you pay in interest can vary over the life of the loan. Your rate can either increase or decrease, depending on the state of the market.
The goal of the FHA home loan program is to provide affordable home buying options to those who need assistance. So, while the interest rate could potentially increase due to market fluctuations, Section 251 ARMs have a few safeguards in place to prevent huge spikes in mortgage payments.
All adjustable-rate mortgages insured through the Section 251 program have interest rate caps. This means that your interest rate can only increase by a specified amount each year and in total.
The interest rate for all FHA ARMs cannot increase by more than 1% each year. Furthermore, it cannot increase by more than 5% from the initial interest rate over the life of the loan.
If you qualify for an adjustable-rate mortgage from the FHA, your lender will determine your interest rate based on a few factors. These include:
- Your credit score – Generally, the higher your score, the lower your interest rate.
- The economy – Rates in 2021 are historically low, but they could change depending on the state of the economy.
- The location of the home – Cost of living varies depending on the state in which you live.
- The size of the loan – Some lenders offer lower rates for homes of certain sizes.
- Your down payment – Typically, the higher your down payment, the lower your interest rate.
So, what happens if your interest rate increases?
Under the Section 251 home loan program, you are required to receive notice at least 25 days in advance of an interest rate increase. This gives you a reasonable amount of time to make necessary adjustments so you can afford your mortgage payment.
If you do not receive any advance notice of a change in your interest rate, it may be best to contact your mortgage lender. Since the company is participating in a government program, it should adhere to the program’s rules. If you are having trouble reaching your mortgage lender, you can contact the U.S. Department of Housing and Urban Development (HUD) for assistance.