Conventional, FHA and VA ARMs
Adjustable-rate mortgage options are available for conventional loans, loans backed by the Federal Housing Administration (FHA) and loans guaranteed by the U.S. Department of Veterans Affairs (VA).
A few things worth noting about ARMs with each type of loan program:
→ Conventional ARMs require a higher minimum down payment
. You’ll need at least 5% down for an ARM loan compared to only 3% for fixed-rate conventional loan programs.
→ FHA ARMs allow lower minimum credit scores and down payments
. Borrowers with scores as low as 580 may qualify for an FHA ARM
with a 3.5% down payment.
→ VA ARMs come with extra protections
. To prevent unaffordable rate increases for VA borrowers, the VA sets the initial and subsequent caps to 1% yearly on any hybrid ARM that adjusts within five years.
An interest-only ARM allows borrowers to only pay the interest due on the loan for a set time, usually between three and 10 years. During that time the loan principal isn’t paid down at all, but your monthly payment is lower.
Payment-option ARMs are rare since they were all but outlawed after the 2008 housing crash. An option ARM allows you to choose different monthly payment “options.” The three choices typically include a principal and interest payment, an interest-only payment and a minimum or “limited” payment.
With the limited payment option, you can opt to pay less than the interest accruing on the principal, and add the unpaid interest to the loan balance. In other words: Your loan balance increases instead of shrinking like it does with a regular mortgage.