Hello again-
I know what you are all ready thinking. Why read this for so many people have loss their homes due to ARM's recently. This is a true statement but the only reason the did was due to the fact that they were not properly educated on the mattter. Read through this and I will break it down for you and give you tips and hints on how to edge on the market.
Thanks again people!
[size=18]Insurance for Adjustable Rate Mortgages (Section 251)[/size]
Summary:
Section 251 insures home purchase or refinancing loans with interest rates that may increase or decrease over time, enabling consumers to purchase or refinance their home at a lower initial interest rate.
Purpose:
FHA's mortgage insurance programs help low- and moderate-income families become homeowners by lowering some of the costs of their mortgage loans. FHA mortgage insurance also encourages lenders to make loans to otherwise creditworthy borrowers and projects that might not be able to meet conventional underwriting requirements, protecting the lender against loan default on mortgages for properties that meet certain minimum requirements--including manufactured homes, single-family and multifamily properties, and some health-related facilities. The basic FHA mortgage insurance program is Mortgage Insurance for One- to Four-Family Homes (Section 203(b)). FHA administers a number of programs, based on Section 203(b), that have special features. One of these programs, Section 251, insures adjustable rate mortgages (ARMs) which, particularly during periods when interest rates are high, enable borrowers to obtain mortgage financing that is more affordable by virtue of its lower initial interest rate. This interest rate is adjusted annually, based on market indices approved by FHA, and thus may increase or decrease over the term of the loan.
Type of Assistance:
This program provides insurance for adjustable-rate mortgages, used in conjunction with other widely used FHA single-family products—Mortgage Insurance for One- to Four-Family Homes (Section 203(b)), Single-Family Rehabilitation Mortgage Insurance (Section 203(k)), and Single-Family Mortgage Insurance for Condominium Units (Section 234(c)). Under this FHA-insured mortgage product, the initial interest rate and monthly payment are low, but these may change during the life of the loan. FHA uses 1-year Treasury Constant Maturities Index to determine interest rate changes. The maximum amount the interest rate may increase or decrease in any one year is 1 percentage point. Over the life of the loan, the maximum interest rate change is 5 percentage points from the initial rate. Lenders must disclose to the borrower the terms of the ARM at the time of loan application. In addition, borrowers must be informed at least 25 days in advance of any adjustment to the monthly payment. In most other respects, Section 251 loans are similar to basic FHA-insured single-family loans:
-- Downpayment.requirements can be low—as little as 3 percent. This is because FHA insurance allows borrowers to finance approximately 97 percent of the value of their home purchase through their mortgage.
-- Many closing costs can be financed. This program allows the borrower to finance many of these charges, thus reducing the up-front cost of buying a home. However, not all of these up-front expenses can be folded into the mortgage. In addition to the downpayment, the purchaser must pay for items such as the appraisal and the title search. FHA mortgage insurance is not free: borrowers pay an up-front insurance premium (which may be financed) at the time of purchase, as well as monthly premiums that are not financed, but instead are added to the regular mortgage payment.
-- Some fees are limited. FHA rules impose limits on some of the fees that lenders may charge in making a loan. For example, the loan origination charge charged by the lender for the administrative cost of processing the loan may not exceed one "point"—that is, one percent of the amount of the mortgage (minus the mortgage insurance premium, if it is being financed). In addition, property appraisal and inspection fees are set by FHA.
-- HUD sets limits on the amount that may be insured. To make sure that its programs serve low- and moderate-income people, FHA sets limits on the dollar value of the mortgage loan. The current limit ranges from $81,548 to $160,950. These figures vary over time and by place, depending on the cost of living and other factors (higher limits also exist for two- to four-family properties).
Eligible Grantees:
FHA-approved lending institutions, such as banks, mortgage companies, and savings and loan associations, can make insured loans under Section 251 through HUD Field Offices.
Eligible Customers:
All persons intending to occupy the property as their principal residence are eligible to apply. (All FHA-approved lenders may make adjustable rate mortgages; creditworthy applicants may qualify for such loans.)
Application:
Any person able to meet the cash investment, the mortgage payments, and credit requirements can apply. The program is generally limited to owner-occupants. Applications are made through an FHA-approved lending institution. Borrowers can locate FHA-approved lenders through the searchable listing provided on HUD's homepage.
Funding Status:
In FY 1996, 184,213 units valued at about $17 billion were insured under Section 251. Through September 30, 1996, 874,838 units valued at $75.6 billion had been insured.
Technical Guidance:
Insurance for ARMs is authorized under Section 251 of the National Housing Act (12 U.S.C. 1715z-16). Program regulations are at 24 CFR 203.49. The program is administered by HUD's Office of Housing-Federal Housing Administration. Prospective lenders should contact the Director of Single Family Programs at the nearest HUD Field Office about participating in this program. Loan processing and administration for this and other FHA single-family mortgage insurance products are handled through one of four consolidated Single Family Homeownership Centers.
For More Information:
General—To learn more about this program and other financing options, homebuyers should contact a HUD-approved lender for a searchable listing of approved lenders nationwide, a HUD-approved housing counseling agency, or the toll-free FHA Mortgage Hotline, 1-800-CALLFHA. The Federal Reserve Board has prepared a booklet on ARMs, Consumer Handbook on Adjustable Rate Mortgages, which is available on the Internet or by mail from HUD.
Link to HUD: http://www.hud.gov/offices/hsg/sfh/ins/251--df.cfm
Okay before I start the break down for you let me bring something to your attention, there are non-profit orginizations that offer down payment assistance for first time homebuyers and repeat buyers as well (the only one I know for sure that offers the repeat Nehemiah Foundation).
1. Nehemiah Foundation= 3%
2. Ameridream Inc.= 10%
3. Genesis Foundation= $22,500
4. Home Downpayment Gift Foundation= $30,000
5. Partners in Charity Inc.= 2%-10%
6. Future Home Assistance Program= 6% and more
7. The Sovereign Grant Alliance= 3%
8. Hart Gift Program= $15,000
Note: You can find all of their web-pages online via yahoo or Google and the percentage is according to the final purchase price agreement.
Now to get started: An adjustable Rate Mortgage (ARM) is a loan program that is meant to change according to market. This may seem scary right well that is only because we have all ways been taught that a fixed rate mortgage is the best way to go. But this is not all ways the case if you know the ins and outs and how to profit from this type of program.
Usually (the biggest reason people went into default) people choose from the ARM pick a payment plan and got themselves in asticky situation. here is how the loan works and how it looks for the most part when you receive your bill in the mail. You will have four options to choose from to make a payment and it will go according to whichever payment option you have made (let's us do this on a $300,000 mortgage).
1. 15 year payment = $2851.25
2. 30 year payment = $2103.37
3. interest only payment = $1775.00
4. negam payment = $1446.63
Well lets see 9 out of 10 times I am guessing the average borrower will make the negam payment because it looks like the best payment plan right. Wrong let me explain really fast what each payment mean and what will happend if you use this route.
1. If you choose this payment plan your bill will be much higher than any of the others but you you will pay off the loan in 15 years. Depending on what type of ARM you have it will be fixed for a cetain time (3/27, 5/25,10/20, etc. note that the first number stands for how many years the payment will be fixed and the second stands for how many years the payment will be adjustable) and then adjust according to your program, but plan and simple you will pay it off sooner.
2. If you choose this plan it will be just like the first instead it is based on a 30 year mortgage (meaning it will take longer to pay off), and have a lower payment. But remember you will spend twice the time paying if off then your first option if you follow you amotization schedule.
3. If you choose this payment the only difference is that you only pay lender interest and no principle. Mean you will have a much lower payment than the other two but will not apply any of you payment to pay down the mortgage. After the fixed period is done it will adjust accordingly to your program and then when your 30 payment plan is over with you will have a ballon payment. A ballon payment is one lump sum that you have to pay to the lender in order to pay off your loan balance. Meaning since you had 30 years of interest only you never applied anything to the principle and would have to pay $300,000 ballon payment when it comes due. (I will let you know how this can be the most profitable way to pay off your mortgage and possibly a lot sooner)
4. If you choose this payment it will be the lowest one of them all and you will be happy for a short period of time. It works just like the rest according to its fix period and adjustment period but there is a slight catch. Since you have a lower payment this is what happened the lender cut the amount of interest you have to pay and deferred it. This does not mean that you have a lower payment and you do not have to account for the interest, it only means that you made a payment that didn't account for that months interest and it has become deferred. Well you ask what happens to that interest that I didn't pay? The lender simply puts it to the back of the loan and it gets stacked on top of you loan balance.
Your balance is = $300,000.00
regualr interest payment = $1000.00
You pay = $500.00
New Balance is = $300,500.00
You get the picture of doing this every month and remember since you balance goes up then you payment will increase as well.
But wait the lender isn't all that bad they will only let you go to 110% of the LTV (Loan to Value of your property) and then they will take a recourse and have you make principle and interest payments to pay it down again.
New loan balance = $330,000.00
New Payment Plan = $2167.55
So you can see why people got into trouble in the first place, ARM's were meant for the business man not the average home buyer. Typically a business man would get this so that he could make the 30 yr payment or interest only payment. And if the business got into a tight situation then he would resolve to the negam for sometime until the problem was cured.
Now really fast here is the tip for you if rates change (they go up) typically inflation happens and when that does you usually get a pay raise. So you will in most situations account for the increased payment with your pay raise and that is why ARM's are not so bad. But do know all the ins and outs of an ARM before getting one and realize the good from the bad. Also when this happens APY's (annual percentage yeild) go up as well so the logical way to do it (with proper care and training), is get the interest only payment for 30 years well you are applying the money that would have went to the principle, into an IRA account that can yeild 7% to 8%. If done correctly when you do have to make that ballon payment (we talked about this earlier so please follow along) you will be able to make that payment from the interest earned on the IRA account no problem and have no mortgage and about $250,000 + in your IRA. Remeber Rooth IRA contributions do not get taxed, are taxed deferred and can be withdrawed tax free (if money is taken out prior to the age of 59.5 years you are subject to a 10% penalty tax).
Thank you for your time!
P.S. There are some rules and regulations one must abide by when using the services of any IRA or interest building account. Remember you will need a high earning account in order for this to work and the ones that are tax deferred are your best options.
