Thoughts on FHA versus ARM in time of rising interest rates for low down payment mortgages

[Calidreaming]

With the interest rates rising as rapidly, I am trying to figure out whether we should go FHA or a longer term ARM--either a 5/5, 5/1 or 7/1.  We ideally would like to close in May, but can close as early as March.  My mid-mortgage score is something of a wildcard and could go up significantly in the coming months, but for right now should be no lower than 660 at the time we app (My high score is 726, but I believe my mid score could catch up very soon).  

We originally had been looking at 0% down mortgages from NFCU and 3% down First-Time Homebuyer 30 year fixed options.  Before rates started rising, our mortgage payment with a 30 year fixed conventional mortgage and FHA would have been about the same, so we were leaining toward conventional mortgages so we could take advantage of more mortgage interest to deduct.  But now the interest rates have risen so quickly, FHA is looking like it will give us a significantly lower monthly payment. 

I really don't like the idea of ARM mortgages, but am now considering 5/5, 5/1 and 7/1 options.  We were anticipating refinancing our loan within 5 years anyway, since we knew our rates were going to be much higher with 0 and 3% down mortgages.  We live in an area where home values appreciate rapidly and held their value well even during the 2008 housing crisis, so we think unless there is a total mortgage disaster, we should have enough equity to refinance.   Our incomes are pretty stable as well and if worse came to worse and we couldn't refi, a 2% rise in interest rates would not cause us to go into foreclosure even though it would be unpleasant.  I'm just wondering what the chances are of rates going through the roof in five years, so I'm still pretty leary of ARMs.

Any thoughts or advice??

[Anonymous]

I am antiARM because my parents got bit by it during the mortgage crisis- $800 a month went to 1600 a month. Up and up. Anyways our 0 down loan though USDA locked 4% when we closed in July. So it depends on the program whether it is "significantly" more.

[StartingOver10]

This is just my opinion:  In markets where the interest rate is rising, I would go for a fixed rate rather than an ARM product, especially if this is a property where you are going to live for a long time (5+ years).  

The biggest problem with ARM's is you don't know what the market rate will be at the time you have to refi. If the rate is fixed, then you can choose the best time to refi and not be penalized when you do refinance.

This is my take on FHA:

Have your LO prepare a LE for each of the programs so you can see the cost for either type of loan, both in monthly payments and closing costs + prepaid expenses.

The program that fits your needs will become apparent when you compare the two.

If there is a negligible difference in payments, then go with the conventional mortgage so you have the ability to drop the MI without having to refi down the road. 

[Revelate]

Right now interest rates are anyone's guess.

Unless you plan to either sell it or pay it off within the time period, I wouldn't bother.  Penfed's 15/15 ARM maybe instead of a 15 or 30 year mortgage if you plan to pay it off in that time frame but the interest rates are pretty similar to a 30 year fixed... or at least that's a long enough time to see where things are going.

My own possible refinance plans just got kicked to the curb based on current interest rates so at least that's one less thing I have to worry about personally heh.

[Calidreaming]

Thanks everyone for your thoughts!  After mulling it over it does seem FHA will be our best bet but I guess we have to wait until we apply to get the actual payments and rates before we rule out other options.

Revelate, so sorry about the rising rates messing up your refinancing plans, as well.  Just our luck that rates would rise just as we're about to put plans into action!

[Revelate]

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@Calidreaming wrote:

Thanks everyone for your thoughts!  After mulling it over it does seem FHA will be our best bet but I guess we have to wait until we apply to get the actual payments and rates before we rule out other options.

Revelate, so sorry about the rising rates messing up your refinancing plans, as well.  Just our luck that rates would rise just as we're about to put plans into action!

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Well my rate doesn't suck (3.25% plus the 1% cash back Chase offer which takes it to like 3.17% or something) but I was looking at dropping my payment down from 1818 to something around 1000 as I was cashflow impaired at the time (well technically still am but I expect to be back employed soon after kicking school to the curb).

The plan was when I first started looking at this was to refinance to a 5/1 ARM or similar and just throw wads of cash at it as my interest rate would've been around 2.6-2.7% on that then.  Now though I'm looking something like 2.875-3 and that's a non-starter especially factoring in the refinance costs.   I might be able to throw enough cash at it in the next 6-8 months to get under the 60% LTV line and pay off the HELOC, and I might be able to have my tax lien off via EE... and maybe, *maybe* between a 740+ and a <60% LTV it makes sense if interest rates don't go too much further, but I can't go and refinance after two paystubs which is what I was sort of hoping for.

As is if I just start chucking identical money it would be paid off on identical time periods so refinancing doesn't make sense, but I'm not in a terrible place.

[Calidreaming]

Yeah, you are doing pretty well all considering!  I don't think we are in a terrible place either.  It wasn't all that long ago that folks with FICO scores under 720 weren't able to be approved for mortgages at all and needed at least 10% down so I just think of that to keep from getting discouraged.