Category → fha loans
ARM’s are not ALWAYS a Dirty Word!
With the continued run of low interest rates there is a phenomenon that has gone largely unnoticed lately. That is the fact that the spread between the benchmark 30 year fixed mortgage and ARM’s (adjustable rate mortgages) has become quite large. This leaves an opportunity for perspective home buyers to buy more house and/or have a significantly reduced payment for a 3 to 10 year period. This can be a great option if you are looking at an ownership period that fits within the fixed rate period of the ARM. I am not referring to any of the “exotic” products that helped lead us into this economic mess but rather good, old fashioned, full doc, sanity based ARM’s!
Let’s take a look at what is available under the FHA loan program. I’ll concentrate on these as these are the most attractive adjustable products on the market today. FHA offers bot a 3/1 and a 5/1 ARM with as little as 3.5% in down payment requirement. The index they are tied to is the 1 year treasury constant maturity and they carry a margin of 2.00 to 2.250 (very low by conventional loan standards). Centering on ythe 5/1 ARM, currently we have a start rate of 3.750%! This is how a typical ARM works:
- Current Index Value .390%
- Margin 2.250%
- Implied Rate 2.640%
The loan itself has caps of 1/1/5. This means at the first adjustment the rate can go up or down no more than 1% (this would be at the end of the 5 year fixed rate period). Thereafter, the loan adjusts every 12 months with a maximum movement of 1% each adjustment and can never go up more than the 5.000% cap over the life of the loan (maximum lifetime interest rate in this example would be 8.750%). When looking at the implied rate above, if you were at the end of your five year fixed period and were to adjust today, your rate would move towards the implied rate or in this case would go down from the starting 3.750% rate to 2.750%! Over time there is likelihood that the ARM rate will go up but on this particular FHA program any borrower would safe for a targeted ownership period of 5 to 7 years and could save significantly on interest costs.
With a comparable fixed rate loan at 4.875%, the interest savings on the 5/1 ARM over the first 5 years would be approximately $13,883 and your actual loan balance on the ARM would be $3,968 lower when compared to the fixed rate loan. These numbers are based on a $250,000 loan amount.
No negative amortization, no dangers of recast, no prepayment penalties, no hidden whammies, just a good old fashioned conservative ARM that can save money in the form of reduced monthly payments, reduce interest costs, and make that dream home more affordable and comfortable!
Attention Realtors, Asset Managers, and Sellers – There is a Solution
I am writing you this post in an effort to inform you of an FHA loan program that is specifically designed for distressed properties. It has been my experience that many real estate agents and asset managers alike are either not aware of the program at all or have several misconceptions. With a little clarification, I think you will see that this loan program is of great benefit to both buyers and sellers.
The FHA 203 (k) loan program allows a borrower to finance in all the costs of rehabilitating a property. It allows an FHA borrower to take advantage of purchasing a property that wouldn’t normally be FHA financeable. This program is a tremendous tool for you as a seller as well. Property condition issues won’t hold up your escrow because any FHA conditions that would appear on an appraisal will be addressed by the borrower’s financing program and after the close of escrow.
Please also be aware that Mason-McDuffie Mortgage Corporation has a Full Eagle status with HUD and is therefore fully delegated to underwrite all FHA/VA loans through its in house banking. This significantly cuts back on the normal delays that brokers/bankers are experiencing today with processing government loans. Our average close on FHA is 21 days. I am available to furnish references should the sellers or their agents have any concerns with regard to this fact.
At Mason-McDuffie Mortgage we understand that information is your key to a successful transaction and so I’m always available to answer any loan questions that you may have.