Interest only & 3/27 ARM

[xapooh]

Does anyone know the pros and cons of an interest only & a 3/27 ARM Loan? Also, is it beneficial to one that has a median score of 600 to apply for either type? I am looking to purchase a home in the next couple of months and was wondering what options would be best for me. thanks to all expert advice!

[SinkingFast]

Not many pros as the first few years of any 30 year mortgage payments are predominantly interest, and very little principal.

So, even tho the first 3 years are interest only, the payments won't be that much smaller for monthly budgeting purposes.

If you're planning to sell and move within 3 years and the market it booming with no end in sight, you could make money without amortizing principal, and get out before the ARM adjusts.

Personally, I wouldn't do it. Interest rates are low. Not the lowest they've been, but relatively low. We've owned houses for over 20 years. We did well with ARM's in the past when interest rates were higher than now. I'm talking 9-10% range for fixed when we borrowed. Because the interest rates adjusted down while we owned the houses. With today's rates, over the long haul, an ARM is more likely to go up over time.

Plus, if you're interest only, it's easy to pay interest only. Then at the 3 year mark, when the ARM hits, you'll be looking at a 30 year principal to pay off in 27 years at potentially a higher interest rate. With a regular loan, you could have easily amortized a few thousand dollars in equity at that point.

[HopeinHorizon]

I don't like Interest only, it is like renting from the bank...

But you need to find out other loan terms on the 3/27. That could be a great product for someone coming out of bankruptcy. Find out how often the ARM can adjust and that will help compare terms of loans.

A lot of times 3/27 ARM's are great products with someone that has mediocre credit here is why:

Say the ARM rate is 5.5 for the first 3 years (thats what the 3 means in front of the /27)... The ARM will not adjust during those 3 years... During those 3 years you pay EVERYTHING on time, your credit score will get you a lot better 30 year fixed rate at that time...

If you qualify for a 30 year fixed, you might get an interest rate of 8.5%... Assuming that your ARM only can adjust 1 point over 6 months...
First 3 years- 5.5%
4th year- 6.5%
5th year- 7.5%
6th year- 8.5%

You could go 6 years BEFORE your ARM would charge more interest than the fixed, and of course after the 3 years you could always de-ARM, and refinance into a fixed rate, with 24+ months of on time mortgage payments you probably would do even better than the 8.5% that you could get now (and save money with the lower interest rate for a while too)...

[SinkingFast]

Good points, HopeinHorizon.

Can you tell I'm still not thinking like a Credit Challenged person yet??

One thing to watch for, that some lenders will do with ARM's,........... Doesn't happen often but can be in the fine print,........ Is a charge back for the interest difference.

Say you get in at 5.5 and interest rates take a huge jump, and prime goes to 10%, some ARM's have fine print that will allow the difference over, say 2% or so to be charged back against your loan. So look out for that when considering an ARM.

[HopeinHorizon]

I have never heard of that Sinking...

I don't deal a lot with the Floor/Ceiling prices though, so maybe thats where they can get you, but all in all for credit challenged (I like that term) people, ARM's aren't TERRIBLE, and some people get 5 year ARM's and refinance every year... you would be surprised... really at that point they aren't saving ALOT of money, because their points and fees they pay at closing is the difference between the interest rate savings...

[SinkingFast]

Oh gosh, I must be showing my age! LOL

When ARM's first came out, that was something to watch out for. Charge backs against principal. Even tho there'd be a rate Cap, if the actual interest increase exceeded a certain amount, the Lender would Charge Back the difference to the Borrower's principal.

Then the Gov't got involved in that and stopped it for the most part. But when some of the newer type of ARM's came along, 3 year, 5 year, etc. some Lender's built the Charge Back back into the fine print. Evidently not many, but I have read about it. To beware and read the fine print.

[Ch13experts]

I think you may be referring to a negative amortization loan Sinking Fast. That's where the bank lends you money at one rate but only requires you to pay back at a lower rate. It's a nice option when you are borrowing huge amounts of money and your appreciation is going up at least as much as the interest you are deferring. I don't recommend it for people coming out of a BK however.
Xapooh, the answer to your question is difficult, but I'll give it my best. Pros of Interest only loans are that you will have a lower payment, and therefore should qualify to borrow more money. This should help you get that house that may be just out of your financial reach right now, but you expect a change financially before the interest only portion of the loan is over. Cons are that you are not required to pay principal to your loan. This means, every minimum payment you make will not affect the amount of money you originally borrowed. When the interest only portion of your loan is over, your payment will jump. However, (and you knew there was a however) if you paid a little extra every month on your interest only loan, you would accelerate the payoff of your loan significantly more than if you had a fully amortizing loan. In other words, if you borrowed 200,000 at 6.5% fully amortized, your payment would be $1264 on a 30 year loan. But if you had an interest only loan your payment would be $1083. If you took that extra $180.67 and paid it toward your principal balance every month, your loan would pay off sooner. Cool trick.
A 3/27 is as HopeinHorizon explained except that after the 3rd year, you can expect a 3% jump instead of a 1% jump. The first adjustment is always the highest, then every 6 months your rate could change as much as 1% until you reach a fully indexed rate.

The benefits to you are specific to your situation. I would strongly recommend getting a referral to a mortgage broker who specializes in customers with a bankruptcy. There is a website where loan officers subscribe to a list of ethics that they must abide by to be a member. You can check it out at www.NARLO.com. It stands for the National Association of Responsible Loan Officers. I know... it's an oxymoron. LOL. There should be a Loan officer in your state on that site. Give one of them a call.

Best of luck,

[SinkingFast]

Welcome Ed and Luke!!

It's great to see some pros/industry insiders who offer advice and not solicitations!!

Hope you'll hang around and answer more questions that people may have.

[HopeinHorizon]

3/27 is as HopeinHorizon explained except that after the 3rd year, you can expect a 3% jump instead of a 1% jump. The first adjustment is always the highest, then every 6 months your rate could change as much as 1% until you reach a fully indexed rate.


Doesn't Argent have a product that only does a 1 point adjustment even in the first year of adjusting... I am pretty sure their 3/27 adjusts slowly with no big 3% adjustments after the Fixed period...

[Ch13experts]

It's Possible...

It is possible that Argent has such a product, but I am unaware of it. It may be that they have loans available in other parts of the country that are not allowable here in California. It seems a little far fetched to me, but as I have learned with this business, you never know what a lender is willing to do to save their ROI. That is one reason I suggest talking with a local expert in mortgage lending.
My best suggestion is that if you are contemplating one of these types of loans, is to buy out the pre-payment penalty. That way, you don't have to wait the 3 years before you get a better loan. If you improve your credit and pay history, you should qualify for much better loans before 3 years.

Good luck,

[xapooh]

Interest only & 3/27 ARM

THANKS TO ALL WHO HAVE RESPONEDED!!!! THE INFORMATION INCLUDED IN THIS LINK HAS REALLY BEEN HELPFUL.
I do have a mortgage broker but I used to always stay on top of things and starting my financial stability back over I plan on staying on top. Before going in to talk w/ my MB I kind of wanted to know what I could be expecting. The 3/27 sounds like it may be my best option. I am looking to find a 2 bed/2 bath starter home for myself and my son. Hopefully if I get married or need to house a family member I will have the option to move in three years into a bigger home. I really do appreciate you all. I don't know anyone personally but THANK YOU and that's from the depths of my heart. May God bless you and keep you!