The Diamond Blog

How to sell the FHA 3/1 ARM – Thanks to Paul for this suggestion.

You could present a 30 year fixed at 5.25%.

Or, a 3/1 ARM at 3.75%

The difference to the borrower is 1.50% savings for the first three years, which is a 4.50% savings over the first three years. That savings equates to a $11,250 savings on a $250,000 loan.

Then, the 3/1 rate could adjust upwards 1% for the forth year under worst case scenario, so the savings becomes .50% for the forth year which equates $1,250. Total savings at the end of the forth year is $12,500

For the fifth year under the worst case scenario the 30 year fixed gains an advantage of .50% since the 3/1 ARM can adjust upwards another 1% to 5.75%

The total savings by the end of the fifth year is reduced to $11,250

The sixth year under the worst case scenario the 3/1 ARM could become 6.75% reducing the lifetime savings to $7,500

Continuing under the worst case scenario with the 3/1 ARM potentially adjusting upwards 1% per year to a maximum of 5% lifetime Cap, the breakeven is in the 9^th year. The 3/1 ARM is much better over the first 7 or 8 years of the loan.

If the market does not move upwards to the worst case each year during the first nine years, which it probably won’t, the breakeven is pushed out even further than nine years.

The questions become:

1. How long do you plan to stay in this home?

2. How long has it been since the last time you refinanced?

Quite possibly, the answers to these questions will be less than nine years. Not to mention the benefit of the lower monthly payments.

The real financial planner may suggest to take the 3/1 ARM and continue to make the 30 year fixed payment for accelerated principal reduction.

If a borrower comes to you that already has say a 5.50% mortgage, this may be the only way you can go.