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FHA 5/1 Rate Caps Raised

2/6 caps effective April 28

April 5, 2005

By MortgageDaily.com staff

HUD is doubling the annual rate adjustment caps on government-insured 5/1 hybrid ARMs.

Current limits on five-year hybrid adjustable-rate mortgages insured by the Federal Housing Administration allow annual interest rate adjustments of one percent with a maximum increase of five percentage points over the life of the loan, according to a Federal Register notice.

A recently published interim rule, however, raises the interest rate adjustment caps to two percentage points annually and six percentage points over the loan's lifetime. The new 5/1 hybrid ARM is effective April 28, the notice said.

The comment period for the interim rule closes May 31.

The interim rule addresses concerns raised by a majority of commenters regarding the March 2003 proposed rule for the current caps that these did not provide sufficient flexibility for lenders to offer the 5/1 hybrids at rates below the traditional 30-year fixed.

Such "inability reduces the attractiveness of FHA-insured five-year ARMs to both borrowers and lenders since...the appeal of ARMs is based on their lower initial interest rate," HUD said in the notice. "Accordingly, the one percentage point limitation undercuts HUD's ability to offer mortgage insurance for a full range of ARM loans with standing initial interest rates lower than those on conventional 30-year fixed rate mortgages."

"This interim rule will make FHA-insured five-year ARMs more attractive to homebuyers and more closely adhere to the conditions of the mortgage lending market."

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