Helping Washington State homeowners learn more about their mortgage options.
A 10/1 ARM is an adjustable rate mortgage where the interest rate is fixed for the first 10 years and then may adjust at the 121st payment (after the 10 year “fixed period” is over).
After the first adjustment on the 121st month, the rate will adjust annually on the anniversary of the first adjustment date.
With the 30 year fixed rate trending higher over the past few weeks, some may be considering an adjustable rate mortgage (ARM) for the lower rate. An ARM may be worth your consideration if you are planning on not retaining the home or mortgage for longer than the initial fixed period. When contemplating an ARM, you should also factor the CAPS which limit how much the rate can adjust when the fixed period is over and on future adjustment dates.
In today’s post, we’ll compare the 7/1 adjustable rate mortgages to a 30 year fixed – please remember that the rates quoted below are subject to change… and they WILL change (probably before I’m able to publish my post). For your personal rate quote for your home located anywhere in Washington, please click here.
The 7/1 adjustable rate mortgage has a fixed rate for seven years. After 84 months, the rate may adjust up or down no more than 5% (this is the first “cap”). The highest or lowest the rate may ever adjust in it’s lifetime is limited by 5%. After the first adjustment, at 84 months, the rate is fixed for 12 months and then may adjust up or down annually, on the anniversary of the first adjustment date, no more than 2%. The annual adjustments are limited by the lifetime cap and by the “floor” (the very lowest the rate can adjust).
Rates quoted are as of 7:30 am, June 26, 2013 and are based on a loan amount of $400,000 with a loan to value of 80% and credit scores of 740 or higher for a purchase in Seattle closing by July 31, 2013.
30 year fixed rate: 4.500% (apr 4. 658%) priced with 0.981 discount points.
7/1 adjustable rate: 3.875% (apr 3.683%) priced with 0.883 discount points. The highest the rate can ever be for the life of the loan is 8.875% (5 percent cap plus 3.875% note rate). The lowest the rate can ever be is 2.25% (the margin). The margin is added to the current index (LIBOR) at the time of adjustment to determine the new rate, subject to the limits of the caps. As of today, the 12 month LIBOR is 0.688.
Here is the Fed’s booklet about adjustable rate mortgages, which I encourage you to read if you are considering an ARM.
If you are considering buying or refinancing your home located in Pasco, Puyallup, Port Angeles or anywhere in Washington state, I’m happy to help you!
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.
NOTE: for a current rate quote for an FHA ARM or any mortgage for a home located in Washington, click here.
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 of 1%).
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!
You may have noticed on the evening news and the local papers all the bad press about mortgages lately. Specifically sub-prime, negative amortized ARMs a.k.a. payment option plans (which I am opposed to for 99% of the population), 100% financing and interest-only ARMs…to name a few. Many sub prime lenders are restating their earnings and are suffering losses. Some are closing their doors and the remaining are changing their underwriting guidelines. It use to be very easy to obtain 100% financing with a credit score of 600…some lenders would even consider 580. Now, the benchmark is 620. Throughout history, lenders change underwriting guidelines based on market conditions.
Rhonda Porter is a Licensed Mortgage Originator MLO121324 living in the greater Seattle area. Rhonda began her career in 1986 in the title and escrow industry and began her mortgage career in 2000. She enjoys helping people understand the mortgage process and started writing The Mortgage Porter in late 2006. Read More…
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