MORTGAGE BROKES? Is an FHA 1 Year ARM loan at 5% a good deal? We are closing next month.?

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We are financing 95%LTV. The builder is paying all our downpayment and closing costs. Also, how likely is it that we can refinance after 2 years. Our credit score isnt really all that good now, but we expect that if we have no more late payments and 2 existing collections disppear that we might see an improvement in our FICO score.

  1. Reply
    April 30, 2011 at 11:03 pm

    The interest rate is good, and the FHA adjustables aren’t nearly as bad as some of the others you’re hearing about in the news lately. Their interest rate increases are limited to 1% per year.
    Do make sure you can afford the payments at the MAXIMUM interest rate for those years in case something happens and you’re not able to refinance.
    If you keep your payments on time and have stable income and are able to save some money, it’s pretty likely you’ll be able to refinance in 2 years. Keep in mind that NO ONE can guarantee that, and no one knows for certain what terms will be available then.
    FHA fixed rates aren’t much higher than the adjustables, you should price the difference and consider going with a fixed rate now, just in case the market conditions aren’t good in 2 years, or if something happens along the way that would hurt your chances of refinancing.
    Congratulations on the home purchase and good luck with your new home!

  2. Reply
    April 30, 2011 at 11:19 pm

    yes that’s good….but YEA RIGHT ON THE RATE…make sure you have somethign more than a Good Faith Estimate!!!

    30yr fixed are at 6.5% for FHA….or it depends on the loan amount

  3. Reply
    May 1, 2011 at 12:18 am

    Well, If you have a 1 year ARM, which means in 1 year, your rate will adjust. While you CAN afford the 5% interest NOW – what you should be worried about is in 1 year. If you wait 2 years to refi, in this crazy market we are in, who’s to say that the house will have enough equity TO refi. My suggestion: conforming 30 year fixed. FHA has those at good rates. I don’t know what state your in but it’s safe to say that the rates should be in the 6% range (with proper qualifications). Your better off doing that and BUYING down the rate if your determined to have a 5% rate. It will cost you some $ $ $ but will give you the payment you want and will keep you in a good spot. AND it will probably be cheaper than having to refinance in 2 years. If you must get an ARM – get one for no less than 5 years and a prepay that is no more than 2. Hope this helps!

  4. Reply
    Open Book Advisors™
    May 1, 2011 at 1:03 am

    If he is paying all closing costs and 5% downpayment why are you going with an adjustable?

    Get him to buy down your rate on a fixed and then if you can handle that payment you wont be sweating it in 2 years or on yahoo answers asking about how foreclosure proceedings work.

    Let me guess………….the builder’s finance company is doing the loan?

    Get a fixed in this market AVOID adjustable right now until things stablize.
    Always glad to help….
    Good Luck and congrats on your new home!

    Open Book Advisors™

  5. Reply
    May 1, 2011 at 1:41 am

    If you have been reading the news about the current housing situation and the terrible problem that homeowners are facing as their ARMs ratchet upwards, why wouldn’t you lock in a fixed rate now? Why live with the uncertainty and wondering about the future 2 years from now.
    Go fixed and sleep well in your new home! Good luck!

  6. Reply
    Mary B
    May 1, 2011 at 2:15 am

    Nope. I would change that to a fixed rate and if you can’t afford a fixed rate, then I would start looking at a less expensive home.

    ARM rates are NOT good financing tools right now as the rates are too unstable. It will cost you MORE money to refinance in two years than what would would spend NOW in a fixed rate over the next two years….so save yourself the trouble!

    FHA is a great option if you have poor credit, but ARM rates were not designed to get you into a house that you couldn’t otherwise afford a payment on.

    PS: DO NOT ignore the advice of the previous posters that states that you may not have enough equity in two years to refinance…this is a MAJOR source of the foreclosure problem right now. They are very correct. No one knows what your house will be worth in two years….NO ONE.

  7. Reply
    Shawna Marie
    May 1, 2011 at 2:42 am

    If your credit is bad, but you qualify for FHA, then you qualify for a fixed rate. Why in the world would you do an adjustable? You are going to set yourself up for failure. The rate you’ve been quoted sounds like a b.s. deal, just get a fixed rate. If the builder is giving you incentives, then I’m sure you’re using their “preferred lender”. By using someone else I’m sure you would lose your incentives. Tell the loan officer to put you on a fixed rate PERIOD.

  8. Reply
    May 1, 2011 at 3:35 am

    There are several factors you should consider. First, what are property values doing in your area. Contrary to the hysteria you often see in the media, property values in many areas are doing fine and continuing to rise over time at reasonable rates. You should check with an independent source (not your builder or the builder’s agent) whether your area is going up. Second, how long do you expect to stay in this home. It sounds like you expect to stay a while since you are making plans to refinance.

    Because of the limits on how much an FHA ARM’s rates can move, these loans are not the ones creating all the havoc and damage in the housing market. As a matter of fact, historically borrowers with FHA 1 year ARMs have beaten the rest of the market and saved money.

    However, because there is presently a yield inversion, meaning short term rates are much higher in relation to long term rates than they have been, a 5% rate on a 1 year ARM is actually an exceptionally good rate. Your loan, though, will be qualified at a 6% rate because you are putting 5% or less down. This means that you should have no trouble with the first payment adjustment which can be no more than 1% higher than your start rate because you will have already qualified for that payment. Although I can’t know for certain, it sounds like the builder may actually be paying down your start rate because FHA 1 year ARMs are starting at par above 6% right now with most lenders.

    Since the builder appears to be paying 2 to 2.5% to buy down your interest rate, you would be much better off using a builder paid 2/1 buydown which could give you a start rate down in the 4.25% to 4.5% range even though you would still have to qualify based on a 6.25% to 6.5% rate. At the end of 2 years, this loan would settle in at its fixed rate of 6.25% to 6.5% for the rest of its term. If rates are lower than that in two years, you could easily do an FHA streamline refinance as long as your house payments have been made on time, even if your credit otherwise stayed exactly the same and your credit score didn’t go up a single point.

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