ARMs and Interest Only Loans aren’t for Everyone

by Tom Tousignant

in Blog, Home Buying, Mortgages

Fannie Mae, the government run entity that drives the mortgage industry guidelines is rolling out tougher standards for Interest Only and Adjustable Rate Mortgages.

Fannie Mae made its official announcement April 30, 2010.  The changes will roll out to home buyers and homeowners in Charlotte and everywhere else over the next 12 weeks.Fannie Mae tightens its mortgage guidelines

For ARMs with fixed terms of 5 years or less, lenders must now qualify the borrower as if the interest rate on the loan is 2% higher than the real rate. As an example, if the 5 year ARM rate is at 4%, the borrower must qualify as if the rate is 6%.  This may make the 5 year ARM, currently a very affordable product for the right home owner, unaffordable for some people.

Interest only mortgages guidelines are really toughening up:

  1. The borrower’s FICO must be 720 or higher
  2. Borrower must have 2 years of mortgage payments ‘In Reserve’
  3. The mortgage must be a purchase, or rate-and-term refinance. No “cash out” allowed.
  4. The home must be a 1-unit property (No Duplexes)
  5. The home must be a primary residence, or vacation home (Can’t be an investment property)

The 2 years of mortgage payments ‘ in reserve’ means enough money has to be in a borrower’s account at time of closing to make two full years of mortgage payments.

The Fannie announcement does say that this change with Interest Only ARMs is to make sure people use this program as a “financial management tool, rather than as an affordability tool”.

That last statement is  a key point in Fannie’s decision – Interest Only and Adjustable Rate Mortgages are simply Tools.  These loan programs can be used by craftsmen to build financial masterpieces, or by amateurs to destroy.  The power is in the proper use of the tool, and using your mortgage program as an integrated part of an overall home ownership and financial plan.

Interest Only and ARM mortgages allow homeowners to store their money in other places, such as retirement or college savings accounts when used correctly.  Used wrongly, they are for buying too much house, spending too much money, and getting into trouble financially.

If you have, or are considering an interest only or ARM mortgage, let’s create a home ownership plan for you that uses the tool correctly to help you succeed financially.

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