When we had historically low interest rates, people didn’t ask about ARM loans as much but today we hearing more questions, so a good explainer always helps even if you’re a mortgage pro – here’s a refresher. Adjustable-rate mortgages (ARMs) offer upsides and downsides, providing homeowners with an opportunity to capitalize on initially lower interest rates. Among the various ARMs available, the 5/1 ARM has emerged as a popular choice. This post delves into the mechanics of a 5/1 ARM, its advantages, disadvantages, and how it compares to other mortgage options.

What is a 5/1 ARM?

A 5/1 ARM is a specific type of adjustable-rate mortgage. The “5/1” denomination signifies two critical components of the loan: the first number (5) represents the duration in years of the initial fixed-rate period, while the second number (1) indicates the frequency in years of rate adjustments post the fixed-rate term. In essence, for the first five years, the interest rate remains constant, and thereafter, it adjusts annually based on prevailing market rates.

Example Scenario
Consider a 5/1 ARM loan for $300,000 at a 6.5% starting interest rate. For the first five years, your monthly payment would be about $2,045. With a potential 5% lifetime cap, the maximum payment could reach around $3,140.

Key Components of a 5/1 ARM
Introductory Rate: Often lower than fixed-rate mortgages, this rate applies during the initial five-year period.
Adjustment Intervals: Post the fixed-rate term, this is the frequency at which your rate will change.
Rate Caps: These include initial, periodic, and lifetime caps, setting limits on how much your interest rate can increase at each adjustment and over the life of the loan.
Pros and Cons of a 5/1 ARM

Pros
Lower Initial Payments: Initially, the payments are generally lower than those of a 30-year fixed mortgage.
Potential for Rate Decrease: If market rates fall, so could your payments after the fixed period.
Cons
Risk of Higher Rates: Post the fixed period, if rates rise, so will your payments.
Complexity: Understanding rate caps, indexes, and resets can be daunting.
Interest-Only Payments: Some ARMs allow interest-only payments initially, but this can lead to higher future payments and potential negative equity.
Comparing 5/1 ARM to Other Loans

5/1 ARM vs. Other ARMs: Longer-term ARMs like 7/1 or 10/1 have higher initial fixed rates but offer longer stability.
5/1 ARM vs. Fixed-Rate Mortgage: A fixed-rate mortgage offers payment certainty over its life, unlike the potential fluctuations of a 5/1 ARM.
When to Consider a 5/1 ARM

Short-Term Ownership: Ideal if you plan to sell or refinance before the rate adjusts.
Income Growth Expectations: Suitable if you anticipate a higher income in the future.
Financial Flexibility: If your budget can handle potential rate increases, a 5/1 ARM could be a viable option.

The 5/1 ARM offers a potentially lower-cost pathway to homeownership, with the trade-off of future interest rate uncertainty. It’s crucial for prospective borrowers to weigh this balance of initial affordability against the potential for higher future costs. Understanding your financial situation, future plans, and the intricacies of ARMs is key to making an informed decision so please schedule a call or meeting on our website and we can see what best fits your situation!

Understanding Mortgage Proof of Funds (POF) Letter: A Key Document for Homebuyers

When you’re stepping into the world of homebuying, especially with a mortgage, a critical piece of paperwork you’ll encounter is the Proof of Funds (POF) letter. This document is not just a formality; it’s an essential part of the buying process, assuring lenders and sellers of your financial readiness. Let’s dive into what a POF letter is, why it’s needed, and how to obtain one.

What is a Proof of Funds Letter?

A Proof of Funds letter is your financial passport when buying a home. It demonstrates that you have the necessary liquid assets – be it cash, checks, or money in accounts – to cover the purchase costs, including the down payment and closing fees. For cash buyers, this letter shows you can cover the entire home cost. Without this assurance, sellers are often hesitant to consider offers seriously.

Why is it Important for Homebuyers?

The primary role of a POF letter is to legitimize your home purchase offer. In competitive housing markets, this letter can be a game-changer, setting you apart from other buyers who may not have immediate access to funds. However, in some scenarios, like a sale by owner without an agent, this letter might not be as crucial.

Acceptable Funds for Mortgage Proof

Various funds can make up your POF, including:

Money in checking and savings accounts
Liquidated investments or retirement accounts
Gift funds or grants
Bridge loans
Proceeds from pending sales
Remember, the key is liquidity. Assets like mutual funds or life insurance may not count if they can’t be readily liquidated.

Distinguishing Between Preapproval and Proof of Funds Letters

It’s important to differentiate between a mortgage preapproval letter and a POF letter. The former is a tentative nod from a lender about your loan eligibility, while the latter is concrete evidence of your financial capacity to make the purchase.

Getting Your Proof of Funds Letter

So, how do you get this all-important letter? Here are the steps:

Consolidate Your Funds: Ideally, merge your funds into one account well before seeking mortgage preapproval. This ‘seasoning’ of funds makes the process smoother.
Request from Your Bank: You might need to fill out a request form or visit your bank in person. Banks usually provide the letter within a few days.
Provide the Letter to the Seller: Once you have the letter, promptly share it with the lender and the seller, and keep a copy for your records.
Example of a Proof of Funds Letter

Here’s a sample template you might come across:

[DATE]
[NAME OF BANK]
[ADDRESS OF BANK]
[CONTACT INFORMATION]

Dear [RECIPIENT’S NAME],

This letter certifies that [NAME OF INDIVIDUAL/COMPANY], a client since [YEAR], is in good standing with our bank. They hold a total balance of USD $[AMOUNT] in cash deposits.

Attached are the account statements for verification.

For further inquiries, contact us at [CONTACT INFORMATION].

Sincerely,

[SIGNATURE]
[BANK REPRESENTATIVE’S NAME]
[TITLE]

Navigating the homebuying process requires understanding various documents and procedures. The Proof of Funds letter is one such document that can significantly impact your homebuying journey. By ensuring you have this letter, you demonstrate financial readiness and seriousness as a buyer, potentially making your path to homeownership smoother and more assured.

For many homeowners who opt for a conventional mortgage with less than a 20 percent down payment, Private Mortgage Insurance (PMI) becomes a necessary part of their monthly expenses. PMI is an additional charge on your mortgage payment, primarily designed to protect the lender in case of default. However, there are several ways to eliminate this extra cost, which can save you a significant amount over the life of your mortgage.

When Does PMI Go Away?

The Homeowners Protection Act of 1998 set forth guidelines for the automatic termination of PMI. According to the Act, PMI must be removed by the lender once the borrower attains a 78 percent loan-to-value (LTV) ratio. This means that when you have paid down your mortgage to 78 percent of the original purchase price of your home, PMI should be lifted automatically.

For instance, if you bought a home for $300,000, PMI would be removed when your mortgage principal falls to $234,000. It’s important to note that PMI costs decrease as you pay down your loan, and are completely removed when you reach the required LTV ratio.

How to Get Rid of PMI

While PMI can add hundreds to your monthly mortgage payment, there are several strategies to get rid of it:

1. Wait for Automatic or Final Termination
Under the Homeowners Protection Act, PMI is automatically terminated once your LTV ratio hits 78 percent. Alternatively, PMI must be cancelled at the midpoint of your loan’s amortization schedule, regardless of LTV ratio. This applies if you’ve been making regular payments and are in good standing with your lender.

2. Request PMI Cancellation at 80 Percent Mortgage Balance
You can request to cancel PMI when your mortgage balance reaches 80 percent of your home’s original value. This requires a proactive approach, including a written request to your lender and ensuring you meet other lender-specific requirements.

3. Pay Down Your Mortgage Early
Making larger or additional mortgage payments can expedite reaching 20 percent equity, allowing you to request PMI cancellation sooner.

4. Refinance Your Mortgage
Refinancing might be an option if you’re close to the 20 percent equity mark, especially if you can secure a loan that doesn’t require PMI.

5. Reappraise Your Home
In a thriving real estate market, your home’s value might increase enough to push your equity over the 20 percent mark, qualifying you for PMI cancellation.

6. Home Improvements
Significant improvements to your home might increase its value, potentially raising your equity to the required level for PMI cancellation.

Caution: Don’t Drain Your Assets

While eliminating PMI can be financially beneficial, it’s crucial not to deplete your savings or investment accounts in the process. Maintaining a balance of liquid assets for emergencies is a wise financial strategy.

Know Your Rights Under Federal Law

The Homeowners Protection Act ensures your right to eliminate PMI under specific conditions. Familiarize yourself with these provisions and keep track of your mortgage payments and home value. If you believe your lender is not complying with PMI removal regulations, you can file a complaint with the Consumer Financial Protection Bureau.

Conclusion

Paying off your PMI can be a financially savvy move, saving you thousands over the life of your mortgage. By understanding the rules and keeping a vigilant eye on your mortgage balance and home value, you can take steps to remove this extra charge as soon as you’re eligible. Remember, the responsibility to initiate PMI cancellation often lies with you, the homeowner, so stay informed and proactive in managing your mortgage costs.

In 2024, new homeowners are seeing mortgage interest rates have more than doubled since 2021, making the dream of home ownership with the traditional down payment of 20% seem like a bridge that is very far.
However, there are many options and programs that don’t require 20% down. Some loan programs now allow for a much lower down payment, requiring as little as 3 percent in cash. This development significantly eases the burden for homebuyers, especially first-timers.
Understanding 3 Percent Down Mortgage Options
These low down payment mortgages are often part of special programs, typically targeting first-time homebuyers or those who haven’t owned a home in the recent past. Here’s a closer look at these options:
1. Conventional 97
• Backed By: Fannie Mae
• Key Features: Only 3% down required; down payment can be a gift, grant, or other assistance.
• Qualifications:
• Must be a first-time homebuyer or not have owned a home in the past three years.
• Homebuyer education course required for all first-time buyers.
• Minimum credit score of 620.
• The home must be a primary residence.
• Conforms to loan limits (e.g., $766,550 for a one-unit property in most areas).
• Additional Info: Requires private mortgage insurance (PMI) until 20% equity is reached.
2. Fannie Mae’s HomeReady Program
• For: A wider range of properties, including multi-family units.
• Qualifications:
• Open to those who haven’t owned a primary residence in the past three years.
• Credit score minimum of 620.
• Income cannot exceed 80% of the area’s median income.
• At least one unit must be the owner’s primary residence.
• Unique Feature: Counts rental income towards income requirements; down payment can be entirely from gifts or assistance.
3. Freddie Mac’s HomePossible Program
• Distinctive Feature: Allows non-occupying co-borrowers to contribute to the down payment.
• Qualifications:
• Homeownership education for first-time buyers.
• Credit score of 660 or above.
• Income limits apply.
• Must live in the home as a primary residence.
• Additional Info: PMI required until 20% equity is achieved.
4. HomeOne by Freddie Mac
• Target Audience: First-time homebuyers and those looking for cash-out refinances.
• Qualifications:
• At least one applicant must be a first-time homebuyer.
• Usable credit score required.
• Property must be a single-unit primary residence.
• No Restrictions: No income or geographical limitations.
Other Low-Down Payment Options
• FHA Loans: Minimum 3.5% down. Available to a broader audience, including those with lower credit scores.
• USDA and VA Loans: No down payment required, specific to rural area borrowers (USDA) and military personnel (VA).
The path to homeownership in 2024, despite the daunting landscape of high interest rates and challenging savings goals, is made smoother with these innovative low down payment mortgage options. Whether you’re a first-time homebuyer or someone looking to re-enter the housing market, these programs offer a ray of hope and an opportunity to achieve the dream of owning a home. Fill out our easy pre-qualifier on our website and we can see what program best fits your needs!

As we enter 2024, inflation is improving while home prices remain high, if you are planning on buying a home in 2024 here are 5 key steps to take to get ready.
1. Put Savings In A High-Yield Account
If you are planning on buying you will need your money to be “liquid” or relatively easy to access for a down payment.
2. Check Your Credit
You may have heard this before but it’s important, so we’ll say it again. Review your credit report to make sure there are not any errors or attempts at identity theft that can erroneously lower your credit score.
3. Down Payment or Closing Costs Assistance
It’s a good idea to check to see if you qualify for down payment or closing cost assistance or grants.
4. Monitor Your Market Real estate is local as they say so keep an eye on the areas you are looking to buy to see if there are trends in prices and inventory
5. Get Preapproved!
You can fill out our approval qualifier on our website and we’ll help you see how much you can qualify for and pre-approval, this will help you to know you’re buying range.

As we usher in the new year, we want to extend our warmest wishes to you and your family. May this year bring new happiness, new goals, new achievements, and a lot of new inspirations to your life. Remember, a new year means new beginnings, new adventures, and thankfully, new homes! We’re excited to be a part of your journey, whether you’re buying your first home, refinancing, or simply exploring your options. Happy New Year from all of us! Here’s to a prosperous and joyful 2024! 🎉

As 2023 comes to end its a good idea to do a year end financial checkup.
1. Review your budget and savings plan Analyze your spending and saving for the year. Your savings might not have gone to plan this year and that’s ok – focus on replenishing your emergency fund first if needed and recalibrate plan for 2023 if needed.
2. Maximize Retirement Plan Contributions If you participate in a 401k make sure you maximize contributions before the December 31 deadline, you have until April for Roth contributions
3. Review Your Insurance Coverage Check your insurance coverage in many parts of the country housing prices went up, make sure you home is covered under current market prices. Also check your liability coverage and consider getting an umbrella liability policy that covers all your assets, you can get a million dollar policy for a few hundred dollars a year!
4. Health Savings Account Make sure you contribute to your health savings account (if needed) as there are great tax benefits. Also check to see if you need to reimburse yourself from the account for out of pocket payments you made during the year!
5. Charitable Contributions Finally remember to give if you can! Even if you don’t itemize your returns you can still deduct up to $300 for charitable contributions!

A lot of homeowners that are thinking about moving have an option with their home: rent it out or sell it? What to do hinges on various factors, including one’s financial situation and local market conditions. Let’s explore the key aspects to consider, including the financial implications of both options.

Deciding Between Selling and Renting Out Your Home:
A home is often the largest financial asset for many people, making the decision of what to do with it a significant one. Selling your home offers a substantial cash windfall, while renting it provides a steady monthly income. Renting also allows you to continue building equity if property values rise. Consider your personal circumstances to determine the best choice.

When Selling is the Best Option:

Need Cash for Next Home Purchase: If buying a new home depends on the cash from selling your current one, selling is your best option. This approach allows you to apply the proceeds towards a new down payment.
Not Interested in Landlord Responsibilities: Managing a rental property requires time and effort. If you’re not prepared for the responsibilities of being a landlord, such as maintenance and tenant management, selling might be preferable.
Potential for Significant Profit: With property values increasing nationwide, selling your home could result in substantial profit. Analyze your local real estate market to gauge potential gains.
Eligibility for Capital Gains Tax Exemptions: If your home was your primary residence for at least two of the past five years, you may qualify for significant capital gains tax exemptions, making selling financially advantageous.
When Renting Out is a Better Choice:

Temporary Relocation: If you’re moving temporarily and plan to return, renting out your home can be more cost-effective than selling and later buying another property.
Desire for Rental Income: Extra income from renting can be appealing, but remember, if you’re buying another home, lenders will consider your rental income when assessing your mortgage eligibility.
High Rental Demand: If your home is in a sought-after location, renting can be a smart move. Evaluate the rental market in your area to ensure finding tenants is feasible.
Expectation of Property Value Increase: If you anticipate an increase in your home’s value in the near future, renting now and selling later could maximize your profits.
Cost Considerations in Renting vs. Selling:

Costs of Renting Out: These include mortgage payments, maintenance, finding tenants, potential vacancies, property management fees, HOA fees, and landlord insurance.
Costs of Selling: Preparing your home for sale, real estate commissions, closing fees, home staging, and paying off your mortgage are some of the expenses involved in selling.
Economic Downturn Considerations:
With potential recessions, assess your job stability and financial resilience. If you’re unsure about managing two mortgages or dealing with reduced rental income, selling might be the safer option.

Bottom Line:
Choosing between renting and selling your home requires a thorough evaluation of your financial status, lifestyle, and the local housing market. Weigh the costs of both options, consider your future plans, and your willingness to take on landlord responsibilities before making a decision. Of course schedule a free consult on our website and we can let you know how your specific situation looks when we crunch the numbers.

This year has seen challenges for home buyers, with higher rates and lower inventory. However as the year closes, current trends suggest a shift that could be beneficial for homebuyers. This change is primarily due to falling mortgage rates and an increase in the number of properties for sale.

Decrease in Mortgage Rates:
Freddie Mac reports that the rate for a 30-year fixed mortgage has fallen to an average of 7.03%. This is a considerable drop from its 23-year peak of just over 8% recorded in early October. Such a reduction in mortgage rates can greatly influence the affordability and appeal of buying a home.

Surge in Mortgage Applications:
In response to lower mortgage rates, Redfin has observed a 15% increase in mortgage applications since early November, which previously reached a 28-year low. This rise in applications reflects a growing interest in purchasing homes, spurred by more favorable lending conditions.

More Homes on the Market:
Additionally, there’s been a 7% increase in new home listings compared to last year, when interest rates were on the rise. This increase in available properties provides more choices for buyers and may help reduce the intense competition for homes.

Gradual Recovery of the Housing Market:
Despite these positive signs, the recovery of the housing market is progressing slowly. Freddie Mac warns that the increase in applications is beginning to slow down, indicating that while the market is improving, a full recovery is not immediate.

Impact of Federal Reserve’s Rate Increases:
The recent decline in mortgage rates is partly linked to expectations that the Federal Reserve may pause its interest rate hikes. From March 2022 to July 2023, the Fed significantly raised its benchmark rate, affecting the cost of mortgages. This has been a major factor in the sluggish movement of the housing market.

Homeowners’ Hesitance to Sell:
Elevated rates also meant that homeowners with mortgages at rates between 3% and 4% were less likely to sell, leading to fewer homes on the market. This shortage played a role in driving up home prices, adding another hurdle for new buyers.

The current changes in the housing market, characterized by lower mortgage rates and an increase in home listings, offer positive news for homebuyers. However, the market’s recovery is ongoing, and its future trajectory remains uncertain. Homebuyers should stay informed and alert to navigate these shifting market conditions.

The Federal Housing Administration (FHA) has recently made a significant announcement that will impact many homebuyers and homeowners across the United States. As we step into the calendar year 2024, the FHA has updated its loan limits for both Single Family Title II forward and Home Equity Conversion Mortgage (HECM) insurance programs. This change, driven by the persistent rise in home prices throughout 2023, brings new opportunities and considerations for borrowers.

Reflecting on the Housing Market Trends

Julia Gordon, the Assistant Secretary for Housing and Federal Housing Commissioner, highlighted the changes as a response to the continuous upsurge in home prices witnessed nationwide in 2023. With affordability becoming a growing concern, these increased loan limits aim to make FHA’s low-down-payment financing more accessible, ensuring that well-qualified borrowers can still enter the market.

Understanding the New Loan Limits

The FHA adheres to a formula prescribed in the National Housing Act for setting annual loan limits. This involves analyzing county or Metropolitan Statistical Area (MSA) home sale data to adjust loan limits across different cost categories. For 2024, the loan limits are as follows:

One-Unit Properties: The low-cost area “floor” is set at $498,257, with the high-cost area “ceiling” at $1,149,825. For Alaska, Hawaii, Guam, and the U.S. Virgin Islands, the ceiling is $1,724,725.
Two-Unit Properties: Limits range from $637,950 in low-cost areas to $1,472,250 in high-cost areas, and up to $2,208,375 in the special exception areas.
Three-Unit Properties: These start at $771,125 and go up to $1,779,525 and $2,669,275 in high-cost and special exception areas, respectively.
Four-Unit Properties: The limits are set at $958,350 for low-cost areas, $2,211,600 for high-cost areas, and $3,317,400 for the special exception areas.
These adjustments, particularly for the special exception areas, account for the higher costs of construction in regions like Alaska, Hawaii, Guam, and the U.S. Virgin Islands. The changes will be effective for FHA case numbers assigned on or after January 1, 2024.

HECM Loan Limits on the Rise

The HECM maximum claim amount is also seeing an increase. From $1,089,300 in 2023, it will rise to $1,149,825 in 2024, applicable to all areas including the special exception regions.

The Calculation Process

The process of setting these limits is detailed and follows specific guidelines. The FHA sets Single Family forward mortgage loan limits at 115 percent of area median house prices, subject to established floor and ceiling limits. These are based on the national conforming loan limit set by the Federal Housing Finance Agency (FHFA) for conventional mortgages.

For 2024, the national conforming loan limit for a one-unit property is $766,550. The FHA’s minimum national loan limit floor for a one-unit property is 65 percent of this, equating to $498,257. High-cost areas are those where the loan limit exceeds this floor, and the maximum loan limit ceiling for such areas is $1,149,825.

Accessing Detailed Information

For those seeking more information or a complete list of FHA loan limits, including areas at the FHA ceiling and between the floor and ceiling, the FHA’s Loan Limits Page offers comprehensive details.

As we navigate through these changes, it’s essential for borrowers, real estate professionals, and lenders to stay informed and understand how these new limits might influence their decisions and opportunities in the housing market. The FHA’s adjustments for 2024 are a clear response to the dynamic housing market and aim to support sustainable homeownership in a diverse range of economic environments. If you want to see what you can qualify for in the coming year please fill our our quick mortgage analysis on our website!