Adjustable Rate Mortgages (ARMs) have been extremely competitive in rate; often, a 5/1 ARM is a good 1.0%-1.25% below the 30 Year Fixed Rate mortgage. There are advantages and disadvantages to every loan, and as long as you fully understand the loan program you’re getting into and the consequences of the “adjustable” period, it can be an excellent tool.
Fannie Mae has just taken out some of the risks to ARMs by implementing stricter guidelines. The goal is to assure that homeowners are not hit with payment shock and the inability to refinance once the loan enters its adjustment period.
Without going into details on what the rules were prior to the change, the rules now are:
- 25% down payment required (or 25% equity if refinancing). I have one lender that will allow just 20%, but the hit in rate is high enough that you are better off getting a 30 Year Fixed.
- Qualifying: For 3/1 and 5/1 ARMs, you must qualify at the Note Rate + 2.0% or the Fully Indexed Rate, whichever is greater.
- With Interest-Only ARMs, 30% down payment/equity is required in addition to 24 months of reserves (i.e. if you were to lose your job, you have 2 years of housing payments in your asset accounts)
ARMs remain very competitive, but not everyone will be able to take advantage of this type of loan program.
