FHA TIP

3/1 FHA ARM

The 1 and 3-year FHA ARMs are the best ARMS out there right now. As you know there is no pre payment penalty. The index is the Weekly average yield on U.S. Treasury Securities adjusted to constant maturity of one year.

The FHA 1-, and 3-year ARMs allow up to a one percentage point annual interest rate adjustment after the initial fixed interest rate period and up to a five percentage point interest rate cap over the life of the loan. Most ARMS can adjust 2% a year and 6% over the life of the loan.
The FHA 5-, 7-, and 10-year ARMs allow up to a two percentage point annual interest rate adjustment after the initial fixed interest rate period and up to a six percentage point interest rate cap over the life of the loan.The other day I was noticing that a 30 year Fixed rate was paying the same yield at 6.375 as was the 3/1 ARM. If we were to do a loan on the 3/1 arm vs. the 30 year with the loan amount at $100,000 and assuming that worst case on the ARM adjustments, this is what the next five years would look like:

30 year PI payment would be $623.86 at the end of three years the balance on the loan would be $96,336 at the end of four years the balance would be $94,951 and the borrower would have paid a total of $29,945

The 3/1 Arm The first three years the borrower would make payments of $559.97 at the end of the third year their balance would be $95,633. Assuming worst case at the end of the third year and the rate went up 1 % their new payment would be $619.31 and their balance at the end of the fourth year would be $94,258. Lets say the end of the fourth year the rate went up again 1% the new rate would be 7.375 and their payment would be $679.79 it take until the fifth year for the payment to be higher than on the 30 year fixed. The total they would pay out over the four years would have been $27,589 still less than the 30 year fixed. Its going to take several years even after the payment becomes higher than the 30 year fixed before the consumer pays out what they do on a 30 year fixed.

If the borrower made the 30 year fixed payment towards the 3/1 ARM loan the savings would be Hugh by the time they reached the end of their fourth year the balance on the loan would be $91,548. I think the 3/1 ARM is a great program.

Remember if the LTV is higher than 90% on the 1 year arm you have to qualify 1% above the start rate. "You may want to check my math but I think the idea is close"

Want to learn more about ARMS? Try this link out http://www.federalreserve.gov/pubs/arms/arms_english.htm