FHA loans have long been a popular option for first time homebuyers. In today’s mortgage market, we mostly see people who are buying their first home using one of three options: the USDA loan, or an FHA or VA loan. 
All three are great options because of low down payments, more flexible credit requirements and the security of knowing that “nothing crazy” can happen with the loan.
When considering an FHA loan, there are 3 main programs within the FHA program: the 30 year fixed rate, a 1 year adjustable rate and a “hybrid” adjustable rate where it is fixed for 3 or 5 years and then adjusts.
The FHA 1 Year Adjustable Rate Program
The FHA 1 year adjustable rate program is popular when the adjustable rate is typically 2% below where the fixed rates are – which is not the case today. The way the 1 year adjustable rate program works is that your start rate is fixed for a period of 12-15 months and then the rate will adjust each year. When it adjusts, the most that it can move up (or down) is 1% per adjustment period – up to a maximum of 5% above the initial start rate. So if the start rate was 4% and rates moved up significantly over the next 12 months, the most that the interest rate could adjust is 1% to 5%.
In the current interest rate environment, the FHA 1 year adjustable rate program is not currently a popular option because the 1 year adjustable rate is very close to the 30 year fixed rate.
The Hybrid Adjustable Rate Program
The newest loan programs within the FHA family are the 3/1 and 5/1 adjustable rate programs. Just like the 1 year adjustable rate program, these programs fix the interest rate for a period of time (3 or 5 years) and then the rate will adjust. Just like the 1 year adjustable program, when the rate does adjust, the most that it can move up (or down) is 1% per year up to a maximum of 5% over the start rate.
In the current interest rate environment, the FHA hybrid adjustable rate programs are not popular because they often have *higher* start rates than the 30 year fixed rate option.
The FHA 30 Year Fixed Rate Program
The most popular option (by far) for people who are looking at financing their home with an FHA loan is the 30 year fixed rate. This rate is fixed for 30 years and will change. There are no adjustment periods and in the current interest rate environment, this is what I see virtually every person choose.
The FHA 2/1 Buydown
Recently, I have seen the FHA 2/1 buydown program start to emerge and it is only available for FHA 30 year fixed rate mortgages.
The way that a 2/1 buydown works is that a lump sum of money is escrowed at closing and put into a reserve account. For the first year of the loan, your payment is amortized as if the interest rate was 2% lower than what your actual interest rate is and the payment difference is made from the escrow account. For the 2nd year of your loan, your payment is amortized as if the interest rate was 1% lower than what your actual interest rate is and the payment difference is made from the escrow account.
An FHA 2/1 Buydown Example:
100,000 loan @ 6% interest rate = $6,000.
With a 2/1 buydown, the interest rate for the first year would be 4% or $4,000 and the interest rate for the 2nd year would be 5% or $5,000. This means that the homeowner would pay $3,000 less in interest for the first two years of the loan.
The last important note about the 2/1 buydown program – the seller can pay to fund the buydown account!
With the increased popularity of the FHA loan programs, there are 3 options to choose from: the FHA 1 year adjustable rate program, the FHA “hybrid” adjustable rate programs and the (ever popular) FHA 30 year fixed rate. In today’s market, it is more likely than ever that you can negotiate to get the seller to contribute to the FHA 2/1 buydown account as well — saving you thousands of dollars in interest in your first two years of your mortgage.
Arizona Mortgage Rates for December 26, 2008
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Award-winning 2,000-acre community is located at the intersection of the Hunt Highway and Bella Vista Road, five miles east of Ellsworth Road in the southeast Valley. Known as one of the Valley’s most popular master plans for quality and value, Johnson Ranch was recently ranked eighth among the 20 top-selling master planned communities in the United States in 2005.
If you are looking to live in parts of Pinal County, you can still buy a home with “no money down” if you qualify for a program called the USDA rural home loan program.
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