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is this safe?

I just ran across this site today while searching for some listings. My wife and I have been looking at houses for about the past 6-8 months. With the market coming down, we think it is almost time for us to take the plunge. We're looking for places near long beach.A couple of months ago, Wells Fargo approved us for a $400k (although he also said we could probably get as high as about $420k without problem). It was for a 30 year fixed with 3% down. The rate at that time was 6.375%. We have the down payment saved, so we're ready to purchase when we find the right house.The agent also mentioned a 5/1 ARM when I asked him about lower rates. This is what he emailed me about it: "We can always go to the 5/1 program where the rate stays fixed for first 5 years before going to adjustable rate (it's about 1% lower then fix rates). FHA's adjustable is a VERY SAFE loan. Small gradual increases and an opportunity to convert to a fixed rate without having to re-qualify for the loan. It's called a FHA Streamline refinance.".My question is, are these types of loans really safe, is it best to go with the fixed rate, are there any cons to this type of loan, and does it cost anything to convert it to a fixed?Also, since we are already approved from one lender, is it possible to get a ler rate from another lender? And what are some of the current rates out there right now?Sorry to put so much into one post, but I've got a lot of questions. Thanks in advance. I appreciate any advice we can get. We're new to this and trying to educate ourselves as much as possible before purchasing. by kennright from Long Beach, California. Oct 22nd 2009 Reply

Andrew Vierra (Andrew Vierra)
#116 ranked lender in California - 12 contributions

I'll answer you question with a question (also, the same I provided to a client today): The biggest question on an ARM is: Where do you think rates will be in 5 years? The expectation is that inflation is going to start within the next 12 mos. Because rates "hate" inflation, if inflation increases, so do rates. The other issue is declining values....if they get to the point that you're at a loan-to-value greater than 80%, you most likely won't be able to refinance at that time and would have to take whatever the loan rates adjust to. The FHA program allows you to refinance pretty inexpensively, but they just changed the rules this month: You now need an appraisal. If your value delcines, you can't refinance without coming up with more money to get your Loan-to-value right. Today, 30 year rates on a $400,000 FHA purchase are around 5%. For comparison: that's 2.5 percentage points below the historic average for rates. If you'd like to discuss further options, you can reach me at 916-932-7160. Happy House Hunting;-)

Oct 22nd 2009
Leo Harvey (LHARVEY)
#6 ranked lender in Pennsylvania - 142 contributions

Hi Ken: Purchasing a home is certainly a confusing issue for a lot of first timers, so don't despair. Prices have bottomed according to the gov and other research companies so now is a great time to buy. The program that Wells has approved you for sounds like the 97% Freddie conforming. The rate is indeed higher by about 1.5% than the FHA purchase. The only con is you will need 3.5% down. The prior lender is correct in saying the ARM probably is not a good idea right now. Any loan guaranteed by FHA is safe. Look at your options this way: $ 400K at 6.375% will cost $2495 monthly. The same loan at 5.00% will cost $2147 monthly. A savings of $4176 a year. The additional 1/2% down for the FHA loan is $2000 so your payback on savings will occur in only 6 months. This is a no brainer. Keep in mind that the $8000 tax credit for first time home buyers will also apply provided you close befor the end of December. Congress and Obama are also discussing an extension on the credit so keep your fingers crossed if your time frame is a bit longer. good Luck with your search.

Oct 23rd 2009
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