An adjustable-rate mortgage, or ARM, is one option under the FHA home loan program from the U.S. Department of Housing and Urban Development (HUD). Most borrowers who take out FHA loans choose fixed-rate mortgages, also known as 203(b) loans. However, adjustable-rate mortgages may provide more savings regarding interest payments, especially for low-income families and individuals.
Adjustable-rate mortgage insurance programs are designed to help keep costs down for borrowers with low incomes. Section 251 is one such program that provides insurance for ARMs. Continue reading the sections below to learn more about this program and how it can help you save money during the buying process.
Section 251 is an adjustable-rate mortgage program provided by the Federal Housing Association or FHA. This government-backed mortgage was created initially to help low-income families transition into homeowners.
Adjustable-rate mortgages, or ARMs, provided through Section 251 are insured by the federal government. This means that mortgage lenders are protected in the event that a borrower defaults on his or her loan. Because of this insurance, lenders can offer loans to borrowers who may not otherwise qualify for a conventional loan.
Conventional mortgages typically have strict qualifications. Borrowers usually must have high credit scores, high incomes and be able to make a large down payment.
An adjustable-rate mortgage insured by the FHA does not carry the same strict requirements. FHA loans are designed to keep costs low so that low-income borrowers can secure the financing they need to purchase a home.
ARMs are available under the blanket of FHA home loans, which also include the following government-insured home loans:
- Section 203(b) loan
- Section 203(k) rehabilitation loan
- Section 234(c) condominium loan
One of the flagship features of an adjustable-rate mortgage is a fluctuating interest rate. Interest is charged by the lender in exchange for providing up-front funding to buy a home.
With a Section 251 adjustable loan, the interest rate can change over the life of the loan. However, the amount by which the rate can increase is controlled to protect borrowers from extreme surges.
In addition to yearly interest rate caps, Section 251 ARMs are subject to lifetime caps. This means that the interest rate secured at the time of purchase and the interest rate at the end of the loan term cannot be extremely different.
The specific terms for Section 251 ARMs vary depending on the borrower, the lender and the personal financial details. Continue reading the next slide to learn more about ARM terms and how they may benefit you.