Holland says that while the 30-year fixed rate mortgage is often mentioned in the media, the most popular loan he sees right now is a 7/1 adjustable rate mortgage, which has a fixed rate for 7 years and then adjusts each year according to market rates, with a limit on its annual increase. Interest is amortized over a period of 30 years. Adjustable rate mortgages (ARMs) offer lower rates than fixed rate mortgages.
Here are the numbers, which are examples. In practice, the exact numbers vary depending on the buyer’s credit score and overall financial situation, as well as the rate, which can go up or down at any time.
- $650,000 home purchase price
- ARM 7/1 at 5.875%
- 5% down payment, equals $32,500
- 95% funded, equals $617,500
- Payment of $4,990 including principal and interest (P&I), insurance and property tax
- As a general rule, a borrower’s debt-to-income ratio should be 45% or less. So for this mortgage, a borrower or borrowers would need an income of about $11,100/month, or $133,200/year. That number could be higher, depending on the buyer’s outstanding credit balances on things like credit cards and auto loans.
Not included are closing costs, moving costs, maintenance, and any changes a new buyer might want to make to the home.
Holland says he’s had a lot of clients approved for loans who were looking for a home but put it on hold, hoping prices would come down.
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