FHA 5 Year Adjustable Rate Mortgage (ARM)
Features & benefits
- The rate is fixed for five years and then switches to a one-year adjustable rate in the sixth year. The initial rate is normally higher than a one-year ARM but lower than a fixed rate. Annual rate increases are limited to 1%. The lifetime increase is limited to 5%.
- There is a lower initial rate than most 30- or 15-year fixed rate loans while maintaining the security of a fixed rate for five years. Monthly principal and interest payments will remain the same in the loan’s early years, a time when most people can least afford an increase.
Disadvantage:
If the worst-case scenario occurs (a maximum rate increase of 1% per year or a lifetime increase of 5%), it could mean significant changes to your monthly payment.
Tip:
When considering an adjustable-rate mortgage, calculate your monthly payment in the worst-case scenario. If this fits your budget and is an acceptable risk level, the ARM may save you money in the long run.
Federal Housing Administration
In the 1930s, the federal government realized that down payment requirements were preventing many people from buying a home - especially a first home. They created the Federal Housing Administration (FHA) to help with this problem. The FHA does not lend money. It ensures lenders against loss on loans when greater than 80% of the purchase price is borrowed.
An FHA-insured loan can be as high as 96.5%, allowing the borrower to put only 3.5% down. If the lender must foreclose, the FHA pays the difference between the normal loan amount - 80% - and the actual loan amount.
There are costs associated with an FHA loan called Mortgage Insurance Premium (MIP). They take the form of an initial premium and an annual premium. The initial premium can be added to the loan amount rather than being paid out of pocket. There are maximum loan amounts for FHA insurance. If you think an FHA loan might fit your needs, contact us at 1-888-418-BANK or mortgages@dollarbank.com.
