Orange County first time home buyers should continue to receive low mortgage interest rates during the first quarter of 2011. After experiencing historically low rates in 2010, with FHA rates dropping into the 4.25% range, FHA and VA interest rates are currently in the 4.75% (5.428 APR) range. There are several factors that have contributed to the recent increase, but still, rates are very low right loan now.
FHA Loan Programs | 30 year fixed and 5 year Adjustable Rate Mortgage (ARM)
While most Orange County first time buyers choose the FHA 30 year fixed program, some will choose the FHA 5 year fixed, depending on their long term goals with the home they buy. While rates ranging from 4.75% (5.428 APR) for a 30 year fixed are very low, the FHA 5 year adjustable rate mortgage offers rates in the 3.75% (3.594 APR) range. With this program the rate is fixed for the initial 5 years. After the end of the 60th month the rate begins adjusting on a annual basis. The adjustment is based on a fixed margin, typically between 2.25% and 2.75% over the 1 Year T Bill index. For example, an Orange County FHA borrower who got a 5 year ARM 60 months ago would be getting ready to have their first adjustment. They could anticipate their rate going down, at least for the next year. Let’s say their current rate was 4.5%. The current 1 Year T Bill Index is .3%. Adding 2.25% to .3% gives us a current “fully indexed rate” of only 2.55%. There is an adjustment cap on FHA loans of 1%. This means that the FHA borrower would receive a new rate of 3.5% (1% less than their current rate, but not all the way down to the fully indexed rate because of 1% adjustment cap.) There is risk, since nobody knows right now where rates will be in 5 years. And with 30 year fixed rates so low, most Orange County First Time Buyers should choose a 30 year fixed. But if a buyer fully expects to be out of their home within 5 years, then this program may be worth a 2nd look.
FHA 15 year Fixed
The FHA 15 year fixed is a great program, for those who can afford the higher payment that comes with it. The big advantage of a 15 year fixed is that it pays the home off in only 15 years instead of 30 years. But another big advantage, and something most people don’t realize, is that FHA does not require monthly Mortgage Insurance on the 15 year fixed program if the loan is equal to 90% of the property value or less. That saves quite a bit. For example, the standard FHA Mortgage Insurance Premium for loans over 95% loan to value is .9% (on a 30 year fixed). On a $300,000 loan, the monthly FHA mortgage insurance would approximately be $225. ($300,000 * .9%/12 = $225). On the 15 year fixed, the monthly Mortgage Insurance would be $0. Plus, the interest rate is typically .375% to .5% lower than a 30 year fixed. But the accelerated principle pay down does push the payment higher. The payment is approximately 30% higher on the 15 year fixed after taking into consideration mortgage insurance. (On the $300,000 example, that a difference of $2,256 versus $1,789). So for someone who can afford a payment $500 higher, they could save 15 years of payments on the back end of their mortgage. Not a bad plan or the right person.
Authored by Tim Storm, an Orange County, CA Loan Officer – Please contact me for more information about an Orange County, CA home loan. 877-786-4243 x 7.
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