30 Year Fixed vs. 5 Year Hybrid ARM

With fixed rates plunging to record lows, the vast majority of borrowers are choosing the 30 or 15 year fixed rate mortgage. However, in some circumstances, a 5 year ARM, or Hybrid mortgage is a wiser choice. Particularly with FHA loans, the 5 year product is very attractive. The difference between a 30 year fixed rate and a 5 year hybrid ARM, is that the rate on the ARM product starts out at a reduced rate for the first 5 years. Then it can rise as much as 1% per year in the subsequent years. The maximum rise over the entire loan is 5%.

The current FHA 30 year fixed rate mortgage is 4.75%. The 5 year ARM is at 3.25%. So, using a $100,000 loan amount for example, the payment deferential is as follows:

$100,000 at 3.25% = $435.21 per month
$100,000 at 4.75% = $521.62 per month

Net difference of $86.41 per $100,000 financed per month

The 5 year ARM can go up after 5 years. So, using worst case estimates, the payment can rise to $491.94 in year 6, $552.21 in year 7, $615.72 in year 8, $682.18 in year 9, and $751.27 in year 10. It is not until the 10th year that the sum of the ARM payments meets the sum of the fixed rate payments.

Hybrid ARMs are not for everyone, but for a home buyer that expects to sell or refinance within 5 to 10 years, this is a financing option worth considering.

I would be happy to run your custom scenario so determine the best solution to your financing needs.

Below is a graph illustrating the payments:

AVOID EXPENSIVE PMI WITH A "COMBO-LOAN"

This popular program is now back, on a limited basis. Known as 80-10-10 financing, this was a very popular way to structure financing to avoid expensive mortgage insurance. The program was virtually eliminated due to the declining real estate values nationwide. But, now with a stabilizing homes market, I am able to offer this program for purchase and refinance customers in Middlesex and Worcester Counties of Massachusetts.

Simply put, the program sets the First Mortgage at 80% of the property value. The Second Mortgage is then set at up to a total of 90% of property value. Under this arrangement, there is no PMI needed on the first mortgage - saving the borrower hundreds of dollars per month and thousands per year!

A complete pre-approval for financing should be obtained to determine eligibility, rates, and costs associated with this great program. I will provide a side-by-side analysis of this program versus a conventional 90% financing option.

LOWER QUALIFYING CREDIT FOR FHA LOANS

Wells Fargo has announced a MAJOR REDUCTION in minimum credit score for FHA loans. The new minimum credit score to qualify for FHA financing has been lowered to "500". This represents a significant easing of credit floor standards by Wells Fargo. This is not an industry wide change, this is unique to Wells Fargo Home Mortgage. In order to qualify for financing in the newly created lower tier, a maximum of 90% financing is allowed. The following is the new credit (score) guideline:

• Loan score lower than 500 = not allowed
• Loan score 500 to 579 allowed with maximum 90% LTV and the additional requirements listed below
• Loan score 580 - 599 allowed with maximum 95% LTV and the additional requirements listed below
• Loan score 600 and higher allowed with maximum 96.5% LTV

Additional requirements: All of the following requirements apply for transactions with loan scores less than 600:

• Maximum rations of 31/43
• 2 months reserves PITI
• Gift funds not to be used for 5% or 10% down programs
• Down payment assistance programs not allowed for 5% or 10% down programs.

It is IMPORTANT TO NOTE that, unlike Fannie Mae financing, interest rate adjustments/penalties are not applied on a graduating score basis. As a result, a borrower that formerly was assuming a 10% down purchase transaction, Fannie Mae conforming, will have a significant rate advantage with FHA. And, lower score application are ineligible with Fannie Mae, while now eligible down to a 500 score, with the same LOW RATE.

A complete pre-approval is highly recommended to determine eligibility and final rate.