Orlando Mortgage Blog

 

Example 1:  Say you need a $200,000 mortgage for 5 years...

  • 30yr Fixed Rate @ 5.000% has a monthly P&I payment of $1,073.64
  • 5/1 ARM Loan*  @ 3.875% has a monthly P&I payment of -    940.47

Amount saved each month for the initial 60 months (5yrs )             $   133.17

(An I/O** pmt with .5% pt is $687.50 saves $386.14 month)         x     60

You'd actually save this in total payment over 5 years                    $7,990.20

(An I/O** pmt with .5% pt saves $22,168.40 over 5 years)

 

Example 2:  Same $200,000 mortgage with a 10 year goal...

  • 30yr Fixed Rate @ 5.000% has a monthly P&I payment of $ 1,073.64
  • 10/1 ARM Loan* @ 4.500%  a monthly P&I payment of      $ 1,013.37

Amount saved each month for the initial 120 months (10yrs)           $      60.27

(An I/O** pmt with .5% pt is $750.00 saves $323.64 month)                 x   120

You'd actually save this in total payment over 10 years                  $ 7,232.40

(An I/O** pmt with .5% pt saves $38,836.80 over 10 years)

That's 5 to 10 years of lower and stable fixed payments without gimmicks of any kind. That's why standard Adjustable Rate Mortgages have been so useful for many of us for 30 plus years!

 
Both P&I examples are fully amortized, the balance decline is the same over that time. Balances on the Interest-Only options would remain the same they started at for the initial 5 or 10 years, not go higher, but you may always pay more towards principal of course.  If you need to "rent" the money for 5, 7 or 10 years. . .how much money are you leaving on the table by taking a traditional, but higher market rate "fixed rate" loan ($8,000 in example 1 and about $7,200 in example 2)? I/O... speaks for itself, but not much longer (see comments below)!**
 
*  You will qualify on the higher of the start rate or the fully indexed rate (margin plus index). Today that's lower than the typical 5 to 10 yr ARM start rate folks). Advantages abound right now!
 
 
**Freddie Mac announced earlier this year that on or about September 1, 2010, the company will cease purchasing and securitizing interest-only mortgages. Lenders will usually stop taking these 2 months or more before the cutoff to meet delivery dates.
 
**Fannie Mae announced it will tighten lending requirements for interest-only loans and adjustable rate mortgages delivery dates on or before August 1, 2010. Key points are a minimum of 30% down payment (70% max LTV). Lender must insure borrower could still afford payments even if their interest rates on loans with a fixed term greater than 5 years reset to the higher of either 1) the loan's initial interest rate plus 2 percentage points or 2) the maximum the ineterst rate the loan can rise to (lifetime cap rate). So if the loan has a start rate of 3.5% and a lifetime cap rate of 5%, borrowers would have to qualify at 8.5% (start rate of 3.5% + 5% worst case). ARM loans with fixed terms of 5 years or less will qualify at the greater of note rate + 2% or the fully indexed rate, and I/O loans will have the same 70% max LTV and minimum FICO of 720 with 24 months minimum cash reserves. Lenders will usually stop taking these 2 months or more before the cutoff to meet delivery dates.
 
So, word to the wise, if you are thinking of taking advantage of the current I/O terms and advantages do so as soon as possible.
 
 
 
Posted by BILL WILBANKS on May 1st, 2010 1:27 PMPost a Comment (0)
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