Adjustable rate mortgages have got a really bad rap the past few years because of many of the problems in the current U.S. mortgage and real estate market. Some of this is deserved and some of it is not. The primary culprits were the 2 and 3 year fixed subprime adjustable. There were a number of problems with these loans:
- They were made to unqualified borrowers who often didn’t need to document income
- After the 2 to 3 year period ended these ARM’s had no caps on how high they could adjust
- The margin in these are products were extremely high (I will explain margin below
- These loans were made at a time right before the real estate market started to fall
So therefore the media generally made all ARM loans scapegoats because of these 2-3 year fixed subprime ARM’s. However, there were many 5 year and 7 year fixed prime ARM’s made during the same period, that have now adjusted to rates of 3% and 4% well below today’s 30 year fixed. Those borrowers are enjoying very low payments.
This article is to introduce you to FHA 5 year fixed ARM’s. This is a possible alternative to look at if you think you may be selling you house within 5-7 years after you buy. Here are some benefits:
- FHA 5 year fixed ARM’s are generally 1% below 30 year fixed rate loans (so if today’s 30 year fixed FHA is say 4.75%, the 5 year fixed ARM is 3.75%)
- The FHA 5 year ARM is capped where after year 5 the rate on the loan can only adjust a maximum of 1%. So let’s say you got a 4% 5 year fixed FHA loan today, in year 6 the maximum the rate could go up would be 5%. In year 7 6%. And so on and so forth.
- The lifetime cap on a FHA 5 year fixed ARM loan is 5. Therefore if you were to get a 4% FHA 5 year fixed today, the max the loan could go to would be 9%. And the very worst case it would take until year 11 to get there.
- The margin on the FHA 5 year fixed ARM is 2.25 above the 1 year t-bill index. This is a low margin. The subprime ARM’s made before 2008 many times had margins of 6 and more.
Let me quickly explain a margin. In year 6 after the 5 year fixed period of a FHA ARM ends, the loan will adjust to the current 1 year t-bill index + 2.25. Right now the 1 year t-bill is 1.021. So if your loan was adjusting today, your rate for year 6 would be 1.021 + 2.25 =3.27%. The 1 year t-bill index can rise and fall over time.
So if you think you may only keep you home for 7-8 years, the 5 year fixed FHA ARM may be something to consider. The rate is substantially lower than the 30 year fixed rate and can allow you to enjoy lower payments during your period of ownership.
Remember, if you buy a house by April 30th 2010 (and close by June 30th 2010) you may be eligible for an $8,000 tax credit. Here some highlights to remember about FHA loans:
- Only 3.5% down required and those funds can be gifted from a relative
- Low 30 year fixed interest rates
- You don’t need perfect credit to apply for an FHA loan and be approved
- The seller can credit you 6% for FHA closing costs
- FHA has the most flexible qualifying guidelines of any loan available today
Give me a call (858-922-7899) or email (homeloan8@gmail.com) if you have any questions at all about getting approved for a FHA Loan.
Warmest Regards,
Rob Chomentowski
Sr. Loan Officer (and FHA specialist)
858-922-7899
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