FHA 5/1 Adjustable Rate Mortgage
FHA ARMs are extra special in my eyes. I like that they have very low caps limiting how much they can adjust after the fixed rate period is over. Plus, FHA loans may be assumable to a qualified borrower in the future should you decide to sell your home. Today's fixed rates have about a 1 point difference between a 30 year and a 5/1 ARM, but with a 1% rate cap, worse case scenario, the 5/1 ARM will reach today's 30 year fixed rate at it's first adjustment and keep that adjusted rate for one year. Let's see how this pencils out.
As of 12:45 p.m. Feb. 2, 2011, based on a credit score of 720 with a sales price of $400,000 and a down payment of 3.5%, I would quote the following:
30 year fixed FHA with zero points: 4.750% (APR 5.497). Principal, interest and mortgage insurance payment: $2,321.16. ($2033.69 plus $287.08 monthly mortgage insurance).
5/1 FHA ARM with zero points: 3.750% (APR 6.521). Principal, interest and mortgage insurance payment: $2,082.58. ($1805.50 plus $287.08 monthly m.i.).
Based on this pricing, the difference in monthly savings with the ARM is $238.56. Over five years, the savings is about $14,315.
The FHA 5/1 ARM has caps of 1/1/5. This means that the most this rate can adjust on the first adjustment date (after 60 months) is up or down 1%. Using the scenario above, the highest the rate can adjust to is 4.75% and the lowest is 2.75%. The rate will continue to adjust annually no more than 1% up or down for the remainder of the term or as long as the mortgage is retained. The highest the rate can ever be 5% higher than the note rate (this is called the "ceiling"). With this scenario, that would be 8.750%; however it would take 5 years (after the five year fixed period is over) for the rate to adjust that high.
Here's what the principal, interest and mortgage insurance (PIMI) would look like "worst case" scenario assuming your first payment is made today and the rate only adjusts upwards:
PIMI Payments from 2/1/11 – 1/1/16 at $2,082.58 at 3.750%. (Rate fixed for 5 years).
PIMI Payments from 2/1/16 – 1/1/17 at $2,259.96 at 4.750%. (Maximum increase in rate
PIMI Payments from 2/1/17 – 1/1/18 at $2,454.06 at 5.750%.
PIMI Payments from 2/1/18 – 1/1/19 at $2,650.82 at 6.750%.
PIMI Payment from 2/1/19 – 1/1/20 at $2,849.23 at 7.750%.
MI Payment (see NOTE below) from 2/1/2020 to 1/1/2021 at $2,818.20 at 8.750% $310,638.
The rate will continue to adjust annually (on the anniversary date of the first adjustment) and will be reamortized based on the remaining term. The rate can adjust by as little as 0.125% but never more than by 1% up or down and never higher than 5% of the Note rate.
NOTE: FHA monthly mortgage insurance drops off after the loan balance reaches 78% of the value (based on the original value of $400,000 = $312,000) and a minimum of 60 payments have been made. Assuming all payments are made as scheduled, the home owner will reach 78% around 108 payments (9 years) with the adjustable rate mortgage. With the 30 year fixed rate, it will actually take closer to 120 months (10 years) to reach the 78% threshold before the monthly mortgage insurance drops from the payment. Additional payments can be made towards principal but the earliest the mi will be removed regardless of loan to value is 60 months.
The scenarios above are assuming that we finance the upfront mortgage insurance premium of 1%. Another option is for the 1% to not be financed and paid as a closing cost…even the seller can pay for the upfront mortgage insurance premium. At this point, Sellers can still contribute up to 6% of the sales price towards closing costs and prepaids; they cannot pay any of the down payment.
Although my quote was based on a 720 mid-credit score. We're currently approving FHA loans with low mid-credit scores down to 640.
The loan limits for FHA loans in King, Pierce and Snohomish County is currently $567,500 (until October 1, 2011).
Is an adjustable rate mortgage right for you? It depends on your personal scenario is and if you can stomach having your rate change. The 1/1/5 caps are certainly more tolerable than the 5/2/5 caps that most conventional ARMS tend ot have. At any rate, it's good to know what your mortgage options are.
If you are considering buying or refinancing a home located in Washington state, I'm happy to help you!