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Buying a home, many loan options. What does ATOT say?

D

drebo

Diamond Member
So we're buying a home and we have a couple of options for loan:

3% 30-year conventional
FHA 5/1 ARM
(I'm not really interested in a 30-year FHA at this time)

So, basically, the FHA 5/1 ARM has about $4k less total cost to close and the monthly payment is about $100/mo less than the 30-year conventional.

However, the rules for FHA changed and PMI no longer falls off at all during the life of the loan...you have to refinance to a conventional loan to get it off. The 30-year conventional PMI would fall off at 20% equity.

The idea is that I'd refinance to a 25-year conventional after 5 years (of course, assumes that I can get to 20% equity.) The house is getting a new roof and new carpet immediately which will increase the value of the home and thus my equity. Also, home prices are going up.

Basically, I'm trying to find the possible fault with taking the FHA 5/1 ARM and pocketing that $4k and $100/mo. Total house payment will be about 15% of my gross monthly income, so paying down principle early should not be an issue to get to that 20% equity in 5 years.

Is it worth the extra risk over the next 5 years or would I be better off with the 30-year conventional?
 
how are you getting a 3% conventional loan today?

I think the 5/1 ARM only makes sense if you are planning to make the same payment as the 30yr fixed and then either sell or refinance before it resets. Given the long term trend on mortgage rates I went with a 3.2% 30yr fixed last year
 
NutBucket said:
I think you'd get hosed on a refi in the next few years. I'd go for the conventional and lock in a low rate.
Click to expand...

With the way things look, rates will most likely be significantly higher in 5 years.

if getting to 20% equity in 5 years is going to be easy, what about 60%? If you can pay down most of your loan with a no early payment penalty ARM, you can refinance after 5 years, or laugh as the rate goes up by 1% each year on your miniscule principle that's left.
 
I highly doubt you qualify for a conventional loan with 3% down. They rarely get automated approval.

You will more than likely end up with a FHA 30 year fixed, which you will want to refinance into a conventional as soon as you get around 10% equity (assuming rates stay near where they are).

Also there is no such thing as a conventional FHA loan. Conventional means Fannie/Freddie backed, which does not appear likely.
 
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Interest rates are very very very very very very low still. They are going up, they will likely be much higher in 5 years unless the economy collapses again.

You do not want any sort of "arm." Not worth the risk.
 
Oh and what a few people posting in here don't understand is that anyone using 3.5% down on a FHA program is ABSOLUTELY going to refinance as quickly as possible, so the 30yr fixed isn't necessarily the best option depending on your situation.

Not only is FHA monthly insurance insanely expensive now, but as the OP mentioned, it will never fall off. FHA wants to reduce marketshare, and will keep making FHA financing more and more unattractive until it gets to the % it wants.

I just did the financing for two of my friends in the same housing tract. The loan amounts were almost identical...but one qualified conventional and one had to do FHA. The Private mortgage insurance ended up being $91 per month. The FHA loan is ~$350/mo plus the 1.75% up-front and it does not go away.
 
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OCGuy said:
I highly doubt you qualify for a conventional loan with 3% down. They rarely get automated approval.
Click to expand...

Why do you doubt this? I have approval letters from 3 banks for a 3% 30-year conventional. My credit is fantastic and my debt-to-income ratio is tiny.
 
OCGuy said:
Oh and what a few people posting in here don't understand is that anyone using 3.5% down on a FHA program is ABSOLUTELY going to refinance as quickly as possible, so the 30yr fixed isn't necessarily the best option depending on your situation.

Not only is FHA monthly insurance insanely expensive now, but as the OP mentioned, it will never fall off. FHA wants to reduce marketshare, and will keep making FHA financing more and more unattractive until it gets to the % it wants.

I just did the financing for two of my friends in the same housing tract. The loan amounts were almost identical...but one qualified conventional and one had to do FHA. The Private mortgage insurance ended up being $91 per month. The FHA loan is ~$350/mo plus the 1.75% up-front and it does not go away.
Click to expand...

It was basically this...except that on the 3% 30-year conventional, the PMI was STILL almost $200/mo. It wasn't until you got to a 10% 30-year conventional that PMI dropped a significant amount. That made the payment much higher, and the interest rate was much worse.

Because of the lower cash to close, the lower monthly payment, and the lower interest rate, the FHA 5/1 ARM makes the most sense to me. I can take all that money saved and put it in to principle or home improvement that will help build equity. There is no early payoff penalty at any time during the loan, so I can refi at virtually any time.

My intention is to refi in the 4th year, and even if rates double, I'll still be ahead over the life of the loan.

Alternatively, because it's a 3 bedroom, in 5 years it's entirely possible that we'll have 2 more kids and need a bigger house anyway.
 
OCGuy said:
I highly doubt you qualify for a conventional loan with 3% down. They rarely get automated approval.

You will more than likely end up with a FHA 30 year fixed, which you will want to refinance into a conventional as soon as you get around 10% equity (assuming rates stay near where they are).

Also there is no such thing as a conventional FHA loan. Conventional means Fannie/Freddie backed, which does not appear likely.
Click to expand...

wife and i qualified for a conventional loan for our first home purchase with 0% down and no PMI. we did end up putting down 5% though because it gave us a better rate. still no PMI though.
 
drebo said:
]The house is getting a new roof and new carpet immediately which will increase the value of the home and thus my equity.
Click to expand...

Are you sure about that? It's been 15+ years since I bought my house so the appraisal conventions may have changed, but those items didn't really change the appraised value of the house. True upgrades (kitchen, bath, etc.) had a separate line item on the appraisal but unless your original appraisal had deductions for roof/carpet, I don't think you'll see an increase in appraised value by replacing them.

The appraisal was weird anyway - our house is on a major lake and I think our appraised value jumped only $15K for it.
 
OCGuy said:
Oh and what a few people posting in here don't understand is that anyone using 3.5% down on a FHA program is ABSOLUTELY going to refinance as quickly as possible, so the 30yr fixed isn't necessarily the best option depending on your situation.

Not only is FHA monthly insurance insanely expensive now, but as the OP mentioned, it will never fall off. FHA wants to reduce marketshare, and will keep making FHA financing more and more unattractive until it gets to the % it wants.

I just did the financing for two of my friends in the same housing tract. The loan amounts were almost identical...but one qualified conventional and one had to do FHA. The Private mortgage insurance ended up being $91 per month. The FHA loan is ~$350/mo plus the 1.75% up-front and it does not go away.
Click to expand...

Makes me glad I got in on an FHA loan before they changed the rules.
Should drop off after another 9 years for me. 🙂
 
drebo said:
The house is getting a new roof and new carpet immediately which will increase the value of the home and thus my equity.
Click to expand...

I am not an appraisal expert, but maintenance items like these do not affect home value if they are being replaced due to normal wear and tear.

If it is a situation where there is a severe defect with an item like this (example: leaky roof), and you are getting the home at a substantial discount, then this may be the case.
 
drebo said:
The house is getting a new roof and new carpet immediately which will increase the value of the home and thus my equity.
Click to expand...
Don't count on that at all. Appraisers would not even note the carpet. The roof might get a +$2000 adder, IF they are feeling generous.

We tried to refi to eliminate PMI and we appraised at $x, which didn't remove PMI, so we didn't refi.
6 months later, we did it again and it appraised for $40k more than the previous one.
Appraisals are a crap shoot, unless you live in a cookie cutter neighborhood with numerous identical comparables.
 
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