Need Help With ARM?
We're finding it difficult to find a single family home in our desired Chicago, IL neighborhood that falls into a comfortable price range, so we're considering financing a condo that we love, but which is smaller than we like, using an FHA 5/1 ARM, so that we can build some equity quickly and trade up in the next 5-7 years. I have a little bit of finance background, but trying to figure out the possible pitfalls/risks is boggling my mind, possibly because new baby=lack of sleep. I've seen a lot of really good advice on these boards for other situations, so any help identifying catches or unforeseen risks would be appreciated. Here's the scenario: Purchase price: likely ~280-300kTotal cash available to us for down payment/closing: ~35kCredit: 780+First-time buyers, currently renting month to monthWe can easily afford the payments on this loan on our salaries, including insurance and assessmentsI also have a second contract job, which pays another $1200 a month that can go entirely to extra paymentsI know that FHA ARM 5/1s have an initial rate cap of 1% and a life rate cap of 5%, which gives me a bit of comfort, as we could afford the payments at 8%, albeit not comfortably.This condo is in a very stable neighborhood, so I wouldn't expect huge price appreciation or depreciationI'm assuming we can remove the PMI after 5 years to compensate for the first years rate increase, if any What am I missing? Will I be in a good equity position after 5 years or will I be scrambling madly for a re-fi, if we're not ready to move yet? Would I be better off just getting the 30 year fixed? Is there anything I'm failing to consider here? Thanks for any advice! by hejemony from Chicago, Illinois. Jun 27th 2011
James Barath (JamesBarath)
#9 ranked lender in Indiana - 352 contributions
Hi Hejemony. The biggest assumption that you are making is that the condo that you wish to purchase is an HUD Approved Condominium Association and that it will remain an HUD Approved Condominium Association in the future to allow for FHA insured financing. Beyond that, a 5 year ARM is fixed for the first five years with the 1st maximum adjustment to rate 1% in the 6th year. If you want to safeguard future rise in payments, you might consider putting less money down and saving those funds to offset the projected higher payments in year 6. If I can be of further assistance, please contact me direct as I'm in the Chicagoland market. Have a great day!
Gianni Cerretani (mortgagegodfather)
#32 ranked lender in Georgia - 238 contributions
First off congrats on your new child- second sounds like you need some sleep let me try and help simplify things for you. Stay away from an FHA arm- there is no reason with your liquidity that you cannot afford a 30 year FHA loan and keep the rate in the low 4's high 3's by using discount points. The risk is far too much to take only dropping the rate less then .5 -.75% on an arm product. If you are running into debt to income threshholds speak with another lender that will go up to the max of 56.9%-with your credit scores you should have no problem getting approved for that debt to income level! Also keep in mind you want to make sure the condo allows FHA financing as many condo complexs will not support FHA financing because of the large defaults and changes from units being owner occupied to rentals or investments. Second part- yes you should be able to get rid of PMI after 5 years but that will be largely determind upon how much additional money you put towards principal each month. Assume that house prices are going to depreciate not appreciate so that you can be prepared for a worst case scenario. You want to make sure when you are calculating numbers that your principal balance on your mortgage will be equal to or less then 78% of what you purchased the home for 5 years prior. Good luck! GET SOME SLEEP!
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