Tag Archives: minimum
Option Arm (Page 1 of 2)
An ARM offers low adjustable interest rates with the security of a fixed minimum payment. With ARMs, you have four different payment options each month. ARM mortgages give you flexibility that is unmatched by virtually any other home loan product available in today’s market. If your budget is a bit tight, you can choose to make the interestonly payment or the minimum payment: two payments that are lower than a standard mortgage payment. In months when your budget is not so tight, you can use the extra money toward saving for retirement, paying off highinterest debt, making home repairs, or financing college expenses.
An option ARM program calculates your minimum payment based on your interest rate minus a percentage for the first five years until it reaches the maximum deferred interest level of about 115 percent. During the first five years, your rate is fixed. After that, it becomes a sixmonth fully amortizing ARM. When that happens, the loan loses its potential to be a negatively amortizing loan. If you are looking into getting an option ARM, look for one that limits the potential for deferred interest or negative amortization. The minimum payment on Option ARM mortgages is the lowest of the four payment options, since it is less than the amount needed to cover the interest for the month. This is known as deferring your interest.
Remember that flexibility makes an option ARM mortgage a great choice for borrowers who don’t have a fixed income or for people with fluctuating income-like people who work on commission or selfemployed borrowers; even people who are serious investors who want to channel their money into their investments, rather than their mortgage. Without a fixed income, it can be hard to meet a mortgage payment on time during slow months at work. Say you have a bad month of commission-sales are down; you have to fix your car; and finances are tight. With an Option ARM loan, you can choose to make just the minimum payment to get you through the month, and then make a larger payment when things pick up. However, this loan might be perfect for someone who is in sales and works on commission and who knows how to get by when sales are down. This is not the kind of loan for people who may have lots of debt and are looking to pay the minimum payment all the time.
The minimum payment on Option ARM loans may not fully cover the interest that accrues monthly. If the minimum payment does not cover the entire interest owed, it gets tacked onto your loan balance which means you can get into trouble very quickly, if you don’t know what you’re doing. Your loan balance can actually increase as you make these low payments. You can elect to use the minimum payment as often as you like, but if used too often without making some larger payments in between, you could end up with a mortgage balance that is higher than the value of your home. Quicken Loans offers an option ARM mortgage with a minimum payment that limits how much interest is deferred.
What are the differences between an FHA home loan and a conventional loan?
When you are looking at the different loans available to purchase or refinance, it can be confusing. Over the past year there have been many changes in the underwriting guidelines for all mortgages. FHA has become a very popular choice for many home buyers. Lets take a look at the basic differences between an FHA loan and a conventional loan.
FHA stands for Federal Housing Administration. FHA insures loans that are made by approved FHA lenders, they do not lend directly to borrowers. FHA provides lenders with insurance in case a borrower defaults on their loan.
Fannie Mae and Freddie Mac are government sponsored enterprises (GSE). Their mission is to provide stability and liquidity to the U.S housing and mortgage markets. These GSEs also do not lend directly to borrowers, but they help to ensure that the banks and mortgage companies have funds to lend at affordable rates. These types of loans are typically conventional loans.
The FHA underwriting guidelines are generally more liberal than on a conventional loan. The minimum down payment required by FHA is 3.5%. All of the down payment can be a gift from a family member. The seller is allowed to pay up to 6% of the purchase price towards the buyers closing costs. To be eligible for the 6% from the seller, it must be negotiated in the purchase contract. The minimum credit score that most lenders will allow on an FHA loan is 580.
At this time, the minimum down payment on a conventional loan is 5% – 10%. Due to the lack of private mortgage insurance available, most lenders are requiring that the borrower have a minimum credit score of 720 for a loan to value of 90% – 95%. The seller can pay up to 3% of the purchase price toward the buyers closing costs. However, they can only pay the non-recurring costs. They are not allowed to pay the recurring costs such as taxes, insurance or pre-paid interest. On an FHA loan, they can pay both recurring and non-recurring costs.
One of the other benefits of an FHA loan is that they will allow a non-occupant co-borrower to co-sign on the loan. The income of both the borrower and co-borrower will be combined and used for qualifying. On a conventional loan, the owner occupant must qualify at 35%/43% ratios unless higher ratios are approved by the Automated Underwriting System.
Another difference between conventional and FHA loans is regarding private mortgage insurance. FHA mortgage insurance is required on all 30 year FHA home loans regardless of the loan to value. FHA has a monthly mortgage insurance premium and an upfront mortgage insurance premium. Even though it is called an upfront mortgage insurance premium, it is usually financed into the new loan. On average, the upfront premium is 1.75% of the loan amount. Once you have paid on the monthly mortgage insurance premium for a minimum of 5 years and the loan to value is 78% or below, you can get rid of the monthly mortgage insurance. Speak to your current lender for requirements to remove the PMI.
Conventional home loans also require private mortgage insurance; however, they only have a monthly mortgage insurance premium. They do not require the upfront MIP. Also, conventional loans usually only require mortgage insurance on loan to values that are over 80%. You can have the mortgage insurance removed from your conventional loan once you have paid for 5 years and the loan to value is 80% or below. Check with your current lender for specific documentation needed to have your PMI insurance removed.
Above is just a few of the differences between conventional and FHA home loans. For more information or to contact me directly, please visit