Did you know that Los Angelenos could get an adjustable rate mortgage through the
FHA-insured loan program? ARMs are a dirty word in the media today.
As millions of homeowners have their ARM rates adjusted, the press
peddles fear, causing new home buyers to overpay on the FHA home loans.
look at my favorite, the FHA JUMBO 5-year ARM at 5.625% versus the FHA
JUMBO 30 Year fixed rate mortgage at 6.375%. That's a .75% difference
in rate and for a JUMBO loan, that adds up to some substantial
savings! On a $600,000 mortgage, the interest savings, over the five
year period, is over $20,000; that's the price of a low mileage, gently-used BMW.
risk of a five year ARM is the reset. If you funded a FHA JUMBO 5-year
ARM today, the rate (and payment) would adjust in January, 2014. The
risk, however, is nowhere near the reset risk of yesterday's Alt-A and
sub-prime home loans. Rate adjustments are based on two factors:
index and margin. FHA loans can be offered with a LIBOR or Treasury
Index and have margins that range from 2.25% to 2.75%. Peter G.
Miller, syndicated columnist, believes the lowest margin may be the best choice:
While indexes move up and down, you at least want to compare the
LIBOR and Treasury measures. If the LIBOR margin is within .25 to .50
of the Treasury index, then either index might be attractive. But if
the margin gap is more than .25 to .50, then you might favor the
Treasury index, if the margin is less than .25 to .50 then the LIBOR
might be a better choice.
The view here is that a lower margin is best because the margin is
fixed for the life of the loan. That said, who knows how indexes will
move in the future?
The other risk for a rate adjustment is the "cap". Simply put, a
"rate cap" is the maximum allowable adjustment, up or down, for the
rate (and payment) when the five year period is up. FHA loans have two
interest rate cap structures: a 1/5 for 3-year ARM periods or a 2/6 for longer periods.
In our example, if we obtained a 5/1 FHA JUMBO ARM at 5.625%,
the rate could adjust as high as 7.625%, in 2014. It could adjust as
high as 11.625%, if interest rates went straight up for eight years
(and never came down). If that were to happen, bank savings' rates
would skyrocket from today's 3% to over 9%. There IS a silver lining
amidst any storm cloud.
FHA loans are easy to refinance. The FHA streamlined refinance program
allows for a homeowner to refinance her FHA loan with no income or
asset documentation. This common-sense approach grants a FHA loan
approval if the homeowner can demonstrate that her last twelve mortgage
payments were timely. It can even be offered without an appraisal.
In Los Angeles, the average hold time for a home is 5-7 years. This
means that the average Los Angeleno will most likely sell his home
during that period. If you're a first-time homebuyer, chances are that
you're leaving a LOT of money on the table by insisting on a FHA JUMBO
30 year loan rather than a 5-year ARM. Do your homework and compare
Originally posted on MillionaireRealEstateLender.com