HUD / FHA Fixed-rate mortgages vs. ARM options
When deciding on what type of mortgage to get, one of the first choices that must be made is whether to get an FHA fixed-rate mortgage (FRM) or an adjustable-rate mortgage (ARM).
If you plan on staying in your home for a long time or want the stability of a fixed principal/interest payment over the life of the loan, then a fixed rate mortgage is right for you.
With a fixed rate mortgage, your mortgage interest rate, and most likely your monthly payment, stays the same for the duration of your home loan, or until you sell your house.
An adjustable rate mortgage (ARM) is a mortgage where the interest rate may fluctuate over time. Most people choose an ARM if they want to purchase a house that they only plan to live in for less then 10 years. ARMs often offer lower interest rates compared to fixed-rate loans.
With an ARM, payments may increase at the end of the initial fixed term if interest rates have increased. According to the FHA website:
FHA ARM Type
Required Time Frame for First Adjustment
No sooner than 12 months nor later than 18 months
No sooner than 36 months nor later than 42 months
No sooner than 60 months nor later than 66 months
No sooner than 84 months nor later than 90 months
No sooner than 120 months nor later than 126 months
Other HUD / FHA Loan Programs
The FHA has a number of programs intended to provide large discounts on homes for certain people. These discounts usually involve HUD homes – houses that are owned by the Department of Housing and Urban Development. When someone gets an FHA loan and can no longer make their monthly payments, the FHA will foreclose on the house. With a foreclosure, the house is sold to the public. These properties are HUD homes and can be very beneficial for people looking to purchase a house:
- FHA and HUD want to sell these homes as quickly as possible in order to recoup as much money as possible. This can be to the buyer's advantage.
- HUD homes for sale are easily accessible through a number of internet listing sites. Visit HUD to view a list of these sites, organized by state. These internet listing sites are not operated by the government; they are run by management companies under contract by HUD. Any real estate broker can make an offer for a HUD home.
- Sometimes HUD will use an auction format to sell these homes.
- People who want to buy a HUD home must either have cash or qualify for a home loan. One can also use an FHA loan to purchase and finance a HUD home.
There are a few extraordinary programs operated by HUD that directly involve HUD homes. Formerly known as the “Teacher Next Door” and “Officer Next Door” programs, they are now collectively called the “Good Neighbor Next Door” program. In this program, any teacher, law enforcement officer, emergency medical technician or firefighter can purchase a HUD home located in a “revitalization area” at a 50% discount. If HUD lists a home at $100,000, then a participant in the Good Neighbor Next Door program will be able to purchase that house for only $50,000. The purpose of the Good Neighbor Next Door program is to improve the state of America’s communities, and HUD believes the 50% discount will attract upstanding citizens to areas where they are needed.
In order to be an eligible participant, you must:
- Be employed full-time
- Be employed as a teacher, law enforcement officer, firefighter or emergency medical technician.
- Be able to live in the discounted HUD Home for 3 full years
- Use a real estate broker or agent to buy the discounted HUD Home
Check out HUD for more details.
If you meet the above criteria and can pay in cash or prove that you can get financing, then you can participate in the Good Neighbor Next Door program. But what is considered a “revitalization area? Revitalization areas are located across the United States and usually have one of the following:
- Very low income compared to the surrounding metropolitan area or state
- Many vacant or foreclosed properties
- Low homeownership rate
- Above-average crime rate
HUD sees revitalization areas as places that are ripe for improvement and believe that having teachers and police officers move into the areas will help development. Though “Good Neighbors” must reside in the home for 3 years, after that period of time they can sell the home and keep any profit for themselves.
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