Archive for May, 2007

The Truth About Caps and ARMs

Wednesday, May 30th, 2007

The current subprime bust can be attributed primarily to 2/28 and 3/27 ARMs. With these adjustable rate mortgages, which became extremely popular in ’04 and ’05, the borrower pays a fixed rate for 2 or 3 years, respectively, and then their interest rate fluctuates annually for the remainder of their 30 year loan. Well, what seemed like a great idea has turned sour when many borrowers found themselves unable to pay the higher interest rates and some mortgage companies have even gone out of business. With many of the 3/27 ARMs beginning to change rates in the autumnal months, things are not looking bright.

Not only can FHA loans potentially serve as a refinancing option for those in subprime trouble, but FHA also will make itself a viable and less risky ARM options for initial borrowers. Although the 30-year fixed is the FHA mainstay, FHA also offers a variety of ARMs. Plus, the FHA protects lenders with annual caps between 1% and 2% percentage points, and life-of-loan caps between 5% and 6%. So not matter what FHA ARM you choose, your interest rates will never go up more than 2% a year and 6% over the full loan term.