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FHA Adjustable rate mortgages are available, and are currently selling at a discount to the true market rate (Margin + index). As with any ARM product, it is especially important to pay atention to these factors.

An FHA ARM is tied to the 1 year Treasury Index (currently 2.89%), but it is a weighted average of the previous twelve months. The margin is available at 2% and there is also a 2.25% margin. The interest rate "caps" will only allow the interest rate to increase/decrease 1% per year, and 5% lifetime cap.

There are advantages and disadvantages, but in the short term horizon (only staying in the home for two to three years), you will be way ahead of the game. I am currently working on a relatively small streamline refinance of $81,400.00, and have handy the savings benefits and additional principal figures.

The 30 year fixed rate is priced at 5.625% and the ARM is at 3.625%. In year one, the borrower would save $103.00/month on the house payment, and due to the lower interest rate, would contribute an additional $560.00 to principal payoff on the mortgage. Year one savings would be in the neighborhood of $1,800.00.

Year two savings (worse case scenario), the payment would increase, but the payment would still save approximately $50.00/mo and the additional principal paid off would bring the total difference on the mortgage principal to about $880.00.

Year three worse case, the payment would be about $2.00/mo lower, and the principal would be about the same as the fixed rate. So, after two years, you would have saved approximately $2,400 in payments, and would owe $880.00 less on the mortgage. There is quite a difference there. The actual dollar differences would be much greater on a larger mortgage.

After year three (if you are still in the home), and worse case scenario applied, the payment would be about $38.00/mo higher than the fixed rate option.

Remember one thing though, the interest rate cap (worse case scenario, the interest rate could be 3.625% + 5% (lifetime cap) or 8.625% interest rate after a little more than 5 years in the home, and the payments could be about 25% higher than a fixed rate mortgage.

Personal experience with an ARM on my own home after twelve years...... Initial rate was 4.50%, I have never been higher than 6.875%, and currently am at 3.875%. I had the choice of 6.5% fixed rate at the time of application, so I kind of like it.

There are also 3 year ARM's and a not very popular 5 year ARM (lenders do not like these and price them near or even higher than a 30 year fixed rate!!))

Short term (three years or less), I would definitely go with the ARM. Longer term, just be aware.

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