Understanding different types of mortgages and benefits of each

Mortgage type as in ARM vs Fixed? It will be very difficult to compare ARM and fixed past the reset date…. you’d have to assume a worst and best case scenario. The ARM will have a cap, but one thing’s for sure is that “rates”, in general, aren’t going lower. So, count on the ARM rate continuing to increase in the future and at every reset thereafter.

Getting a Mortgage with an ARM

I’ve never had an ARM but I believe the whole idea is to get in on the “teaser” rate (the initial rates for ARMS are typically lower) and refinance or sell before the reset date. The horizon for that is usually 3-7 years. For example Amerisave is offering a 30yr fixed @ 3.25 w/ 3.6 pts but also a 5 year ARM @ 2% w/ 3.25 pts. Typical cap is 2% so it may be @ yr 5 your rate goes to 4%, then to 6% on yr 6, etc. The lifetime cap is 5% so your rate would top out @ 7% (or it could go lower, but I wouldn’t bet on that.

 

Will an ARM mortgage be cheaper?

The ARM will no doubt be cheaper in the first 5 years – similar pts but much lower rate – but after that, I’d say it’s very likely to cost more, and the rate can shoot up pretty quickly, erasing your savings from the first 3-7 years. This is what stuck so many people in the housing bubble – they got in on ARMS with the intention to refi or sell before the reset, then values plummeted, and no lender would touch them for a refi (typically underwater), so they were stuck when the rates shot up.

 

What are FHA mortgage loans?

FHA loans are more targeted to those with poor credit and little to no down payment.

Every borrowers scenario is truly unique and the options do change quite regularly with the introduction of new loan products, however, the more recent new loan products are conventional products directed towards making home ownership more possible to those who may not have qualified prior.

The reason you find little on Piggy backs (a 1st and 2nd) or Jumbo is due to those products being very specialized to the specific lender and falling outside of Conventional of HUD/FHA guidelines.

In respect to being a bit off the desired 20% down payment, depending on how far off, structuring the purchase with a seller’s concession towards closing costs and preapaid expenses (i.e. escrows) may get you closer to achieving that 20% down payment; but if not, there are still options, especially for those with excellent credit scores.

 

How much does a house down payment need to be?

In respect to down payments lower than 20% the two most common options are:
a) conventional loan with monthly Mortgage Insurance
b) conventional loan with Lender Paid Mortgage Insurance (LPMI)

You should weigh these two options against each other and see which works best for you. Think of down payment in terms of 5% increments (5%, 10%, 15%, 20%, etc) as pricing adjustments for both rate and Mortgage Insurance premiums are based on Loan To Value (i.e. 80%, 85%, 90%, 95%) and credit score.

In addition, for those making this comparison of loans with less than 20% down, there are wholesale conduits that provide reduced conventional MI premiums for credit 740+ so a mortgage broker may be able to direct your loan to that conduit for additional savings. (FHA loan products are a whole other option for less than 20% down and possible credit issues, but I am not touching on that here.)

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