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Started By
Message
10/1 7/1 5/1 ARM Question Concerning Construction/Mortgage
Posted on 5/30/14 at 6:06 am
Posted on 5/30/14 at 6:06 am
So I call Whitney because I heard they have good products for building a new house. They offer me a choice of a 10/1 @ 4% ARM, 7/1 @ 3% ARM or 5/1 @ 3% ARM product for the construction/mortgage which is "modified" at the end of construction in to a permanent fixed rate product. They're all one time closing.
Why do the 10/7/5 years matter if it gets modified in to a permanent in less than a year? Shouldn't everyone choose the 5/1 since it has the lowest rate?
God damned financial people are like IT people. They speak too fast and in acronyms like you follow what the hell they're talking about.
Why do the 10/7/5 years matter if it gets modified in to a permanent in less than a year? Shouldn't everyone choose the 5/1 since it has the lowest rate?
God damned financial people are like IT people. They speak too fast and in acronyms like you follow what the hell they're talking about.
2
Posted on 5/30/14 at 8:45 am to BeerMoney
Do you want to sell in 5yrs or have to refi?
If not why would you choose the 5yr ARM to get maybe a .5% better on rate which is probably 50 more in payment
7yr arm is the better program of the 3
If not why would you choose the 5yr ARM to get maybe a .5% better on rate which is probably 50 more in payment
7yr arm is the better program of the 3
Posted on 5/30/14 at 9:00 am to BeerMoney
I'd take the 7/1, too, since it's the same rate as the 5/1. Find out what the max adjustment rates are- you might take your chances with the adjustment, if yours is like mine and the max adjustment per year is 2% and the cap is 5%, then it may work out better for you. I locked in at 2.875% 18 months ago for 7 years- In year 8, it can adjust 2% max, so even then I'm still under 5% and if rates are still down, then I can just refi.
Posted on 5/30/14 at 10:07 am to SDVTiger
quote:
Do you want to sell in 5yrs or have to refi?
Well according to the loan officer after I finish building in say 6 months then we all come back to the table and sign me in to a permanent mortgage based on whatever the current rate is. So the mortgage will no longer be adjustable if I understand her right. It'll just be whatever the rate is at that 10 seconds.(4-4.5%)
So if I'm communicating this well to you guys; My confusion is that the 10/7/5 year periods never happen since the construction takes 6 months then it gets modified in to a permanent non-adjustable mortgage.
Posted on 5/30/14 at 12:11 pm to BeerMoney
quote:
Well according to the loan officer after I finish building in say 6 months then we all come back to the table and sign me in to a permanent mortgage based on whatever the current rate is. So the mortgage will no longer be adjustable if I understand her right. It'll just be whatever the rate is at that 10 seconds.(4-4.5%)
that doesn't sound right but I don't know about buying a new home.
Posted on 5/30/14 at 12:23 pm to Hawkeye95
so the ARM is your construction loan?
Posted on 5/30/14 at 7:13 pm to BeerMoney
quote:
Well according to the loan officer after I finish building in say 6 months then we all come back to the table and sign me in to a permanent mortgage based on whatever the current rate is
Sounds like a shitty one-time close product since that would be your second closing...
Eta: since I'm trying to be less of a jackass, the 10/1, 7/1, and 5/1 is your permanent structure. Your construction loan is probably a 6, 9, or 12 month interest only that converts to the ARM of your choice post completion.
So, with the 10/1 you lock in the rate on the perm for 10 years, then it adjusts every year from there on....7/1 locked in for 7, then adjusts every year from then on....
This post was edited on 5/30/14 at 7:19 pm
Posted on 5/30/14 at 7:35 pm to Chris4x4gill2
quote:
so the ARM is your construction loan?
Yeah it's a one time close loan. You build and at the end of the construction it's modified.
I plan on shopping some other options. Any suggestions would be appreciated.
Posted on 5/30/14 at 7:40 pm to BeerMoney
quote:
Yeah it's a one time close loan. You build and at the end of the construction it's modified.
The ARM is NOT your construction loan, it is your permanent. The construction is modified to the ARM structure. You're getting confused by the terminology.
You'll have the interest only for the construction phase that converts to the ARM. I'd be careful if you plan to be in the house beyond the 10, 7 or 5 years.
Your best bet on this market is to do the construction an enter into a 15 or 30 year fixed at completion if you expect construction to be complete in 6 months.
This post was edited on 5/30/14 at 7:41 pm
Posted on 5/30/14 at 7:54 pm to Tiger4Ever
I agree it's confusing. Perhaps I just have a loan officer doing a poor job of explaining this. The whole involvement of the "adjustable rate" terminology is turning me off from Whitney. Here's the conversation chain between us verbatim:
So I responded with this:
And finally she sent me this:
Seems pretty clear to me. I just don't understand why they offer 3 ARM products for the construction if one of them clearly has a better rate and you convert to a fixed rate 30 year loan at the end of construction.(less than a year)
quote:
We will lock you into one of our ARM products during construction & then modify it out at the end of construction into the current 30 year market rate. Below are our ARM products & rates;
10/1 ARM – 4%
7/1 ARM – 3.50%
5/1 ARM – 3.00%
So I responded with this:
quote:
What product are we in at the end of the construction project? If we use the 10/1 ARM and we “modify it” as you say at the end of construction will it still be an ARM for the permanent mortgage? I think I was under the impression that construction to permanent worked as such:
1. I enter in to an Interest only construction loan at a set fixed for a max duration of 1 year.
2. After construction I enter in to a permanent mortgage at a fixed rate for 30 years at 4%-4.5% depending on current rates, credit and my income.
And finally she sent me this:
quote:
You are in the 10/1 ARM or whatever ARM you choose & rate for the one year term of construction. At the end, you can choose to stay in the ARM or modify into a 30 year fixed product. You are not committed to that ARM product. You will be modified into a fixed product if you so choose.
Seems pretty clear to me. I just don't understand why they offer 3 ARM products for the construction if one of them clearly has a better rate and you convert to a fixed rate 30 year loan at the end of construction.(less than a year)
Posted on 5/30/14 at 8:03 pm to BeerMoney
quote:
Seems pretty clear to me. I just don't understand why they offer 3 ARM products for the construction if one of them clearly has a better rate and you convert to a fixed rate 30 year loan at the end of construction.(less than a year)
An arm isn't a construction product that's why it doesn't make sense. I don't think she's being very clear with you. The ARM is a permanent mortgage structure.
You can refi at any time, so she's right in saying that, but it will come with all the costs associated with refinancing.
This post was edited on 5/30/14 at 8:05 pm
Posted on 5/30/14 at 8:15 pm to Tiger4Ever
I see what they are doing. The ARM will be interest only for the construction period and convert to principal and interest at completion on likely a 20 or 30 year amortization.
Again, she's right that you can refinance at any time, but again that will come with additional costs as THAT will be another closing. You'll get the one time close...only if you choose to stay on the ARM.
Again, she's right that you can refinance at any time, but again that will come with additional costs as THAT will be another closing. You'll get the one time close...only if you choose to stay on the ARM.
Posted on 5/30/14 at 8:51 pm to Tiger4Ever
The reason it is an arm is because they are hedging their bets. It is a product that will be sold after your initial closing. The bond that is sold is based on the dual loan package, however there is a certain percentage of homes not completed in six months that is a regular scenario or suppose you lose your job, death, disability, contractor issues, etc. If there is no COO at the end of 6 months you may not be able to roll it into a permanent loan.
Every loan is based on a picture in time, suppose you get a a lien or even id fraud, suppose the construction loan lowers you score, and you don't have the credit or dti to qualify at the lower score? If you don't meet the FNMA guides, you won't be able to convert it.
What you need to do is get their GFE and then call Dow FCU and see what their terms are for construction only. If it is better that your construction with Whitney, use them. What you should be looking for with your initial construction loan is the fees, the rate and the ease of the loan. Whitney may have stage of completion conditions, and conversion fees that cost you more than a construction only. You want to know the fees associated with the construction to service it and inspect it. If rates are in decline, which 6 months from now probably won't be, you may be better of with a onetime close. But you owe it to yourself to look at it. Also be aware that DFCU and other places basically give you a checkbook and you pay the people. What are the Whitney product restrictions, do they allow multiple contractors, does the contractor request a check or do you? There is a lot to be said for ease of the loan. I built right after Katrina and had issues getting contractors that I had lined up for months ahead, with out the easy terms, it would have been rough. Also, they didn't have an issue extending my time.
Every loan is based on a picture in time, suppose you get a a lien or even id fraud, suppose the construction loan lowers you score, and you don't have the credit or dti to qualify at the lower score? If you don't meet the FNMA guides, you won't be able to convert it.
What you need to do is get their GFE and then call Dow FCU and see what their terms are for construction only. If it is better that your construction with Whitney, use them. What you should be looking for with your initial construction loan is the fees, the rate and the ease of the loan. Whitney may have stage of completion conditions, and conversion fees that cost you more than a construction only. You want to know the fees associated with the construction to service it and inspect it. If rates are in decline, which 6 months from now probably won't be, you may be better of with a onetime close. But you owe it to yourself to look at it. Also be aware that DFCU and other places basically give you a checkbook and you pay the people. What are the Whitney product restrictions, do they allow multiple contractors, does the contractor request a check or do you? There is a lot to be said for ease of the loan. I built right after Katrina and had issues getting contractors that I had lined up for months ahead, with out the easy terms, it would have been rough. Also, they didn't have an issue extending my time.
Posted on 5/30/14 at 10:30 pm to tiger94gop
Thanks for all the input guys. I feel like I understand it better now. I'll definitely go talk with other lenders and compare fees/products.
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