An FHA adjustable-rate mortgage, often called an FHA ARM, is a home loan with an interest rate that can change over time.
Unlike a fixed-rate mortgage, where your rate stays the same for the life of the loan, an FHA ARM starts with a fixed rate for a set number of years. After that, the rate can adjust on a regular schedule.
That can make an FHA ARM appealing if you want a lower starting payment, plan to move before the rate changes, or expect your income to grow. But it also comes with risk: if your rate goes up later, your monthly payment will go up too.
Let’s walk through how FHA ARMs work, what to watch for and how to decide whether one may fit your homebuying goals.
Note: Neighbors Bank does not currently offer adjustable-rate mortgage loans.
How an FHA ARM Works
An FHA ARM is a mortgage insured by the Federal Housing Administration. The FHA does not lend the money directly. Instead, it insures the loan, which helps reduce risk for approved lenders.
The “adjustable-rate” part means your interest rate is not locked in forever. Your loan starts with a fixed-rate period, which may last 1, 3, 5, 7 or 10 years. During that time, your rate and principal-and-interest payment stay more predictable.
After the fixed-rate period ends, your rate can adjust based on market conditions. Most FHA ARMs adjust once per year after the introductory period.
Your new rate is usually based on two parts:
An index, which reflects broader market interest rates
A margin, which is an amount added by the lender
Together, those two numbers help determine your adjusted rate.
FHA ARMs also have rate caps. These caps limit how much your interest rate can increase at one time and over the life of the loan. That protection matters, but it does not mean your payment can’t rise. It simply limits how much the rate can change.
FHA Adjustable Rate Mortgage Options
FHA ARMs are usually described with two numbers, such as 5/1 or 7/1.
The first number tells you how long the starting rate stays fixed. The second number tells you how often the rate can adjust after that.
For example, a 5/1 FHA ARM has a fixed rate for the first five years. After that, the rate can adjust once per year.
Here’s a simple breakdown:
| FHA ARM Type | Fixed-Rate Period | How Often the Rate Adjusts Afterward |
|---|---|---|
| 1/1 FHA ARM | First 1 year | Once per year |
| 3/1 FHA ARM | First 3 years | Once per year |
| 5/1 FHA ARM | First 5 years | Once per year |
| 7/1 FHA ARM | First 7 years | Once per year |
| 10/1 FHA ARM | First 10 years | Once per year |
FHA ARM Rates
FHA ARM rates are often lower than fixed-rate mortgage rates at the beginning of the loan. That lower starting rate may help reduce your initial monthly payment.
But the starting rate is only one piece of the bigger picture.
Once the fixed-rate period ends, your rate can move up or down. If rates are higher when your loan adjusts, your payment may increase. If rates are lower, your payment may decrease.
Your actual rate also depends on your financial picture and loan details, including:
Your credit score
Your loan amount
Your down payment
The lender you choose
Current market conditions
That’s why it’s helpful to compare both the starting payment and the possible future payment before choosing an FHA ARM.
Pros and Cons of FHA ARMs
An FHA ARM can help some buyers get a lower starting payment, but it is important to understand both the benefits and the tradeoffs.
| Potential Benefits | Potential Risks |
|---|---|
| A lower initial interest rate than a fixed-rate loan | A higher payment after the fixed-rate period ends |
| A lower monthly payment during the fixed-rate period | Less predictability over the long term |
| More room in your budget early in the loan | More pressure on your budget if rates rise |
| FHA rate caps that limit how much your rate can rise | The need to refinance or sell before the rate changes, which is not always guaranteed |
| A possible fit if you plan to move or refinance before the rate adjusts | More planning than a fixed-rate mortgage requires |
FHA ARM Loan Requirements
FHA ARM requirements are generally similar to FHA fixed-rate loan requirements.
To qualify, you’ll typically need to meet FHA and lender guidelines for:
Credit score
Down payment
Debt-to-income ratio
Loan amount
Property type
Occupancy
FHA allows down payments as low as 3.5% for buyers with a qualifying credit score of 580 or higher, while credit scores from 500 to 579 can qualify with a 10% down minimum payment. Keep in mind that many lenders set their own credit score requirements above FHA minimums.
You’ll also need to stay within the FHA loan limit for the county where the home is located. FHA loan limits can change each year and vary by location, so it’s best to check the current limit for your area before shopping for homes.
There may not be special ARM-only requirements, but lenders review your full financial picture carefully because your payment could change in the future.
Can You Refinance an FHA ARM?
Yes, you may be able to refinance an FHA ARM later.
Some homeowners refinance before the fixed-rate period ends so they can move into a fixed-rate loan before their payment has a chance to change. Others refinance if rates drop or if their credit, income or home equity improves.
You may be able to refinance into:
A new FHA ARM
An FHA fixed-rate loan
A conventional loan, if you qualify
Refinancing can come with closing costs, and approval is not guaranteed. Your options will depend on your credit, income, home value, loan balance and current market conditions.
If you refinance from an FHA loan into a conventional loan, you will remove FHA mortgage insurance and may avoid private mortgage insurance (PMI) if you meet the conventional loan requirements. That could lower your monthly payment, but it depends on your situation.
When an FHA ARM May Make Sense
An FHA ARM may be worth considering if:
You plan to live in the home for only a few years
You expect your income to increase before the rate adjusts
You are comfortable with some payment uncertainty later
You plan to refinance before the fixed-rate period ends
You want to compare a lower starting payment against a fixed-rate option
It may not be the best fit if you need a steady payment for long-term budgeting or if a higher future payment would stretch your finances too far.
A fixed-rate mortgage may feel more comfortable if you plan to stay in the home for many years and want your principal-and-interest payment to stay predictable.
With over 11 years in the mortgage industry, Matt Roy has spent the last 7 years as an underwriter. He’s passionate about understanding the “why” behind lending decisions and helping homebuyers succeed.