| Cash Flow ARM Payment (real estate)
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Cash Flow ARM Payment
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If you are interested in purchasing a home, you should call in a home inspector after you have signed your purchase agreement or contract. But, be sure the contract includes a clause stating that you are not obligated to purchase the home if you are unhappy with the results of the home inspection. In addition, your clause should list any obligations of the seller and the buyer following the inspec... Read real estate article
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Cash Flow ARM Payment
Cash Flow ARMs
A cash flow ARM is a minimum option payment mortgage.
This means the mortgage allows you to "choose your monthly payment" from one of several options.
The payment options are usually to pay your mortgage as if it were a 15 year mortgage, or pay it as if it were a 30 year mortgage, or pay it as if it were an interest only mortgage, or pay a minimum payment that is below the interest only mortgage.
The minimum payment option on a cash flow ARM usually lasts for the first several years of the mortgage, after which the loan reverts back to a normal loan. For many borrowers this offers minimum payments for the first five years.
If you make the minimum payment you will have the difference between the minimum payment and the interest only payment added onto the principal of your loan. This is known as "negative amortization". For many borrowers this is acceptable because the value of their property also continues to increase, or they simply prefer having a low monthly payment.
The minimum payment rate can be as low as 1% on those loan types. From time to time there are lenders who have offered start rates even lower than this.
The 1% start rate is not the interest rate, it is the rate used to calculate the minimum payment.
The 1% start rate is usually offered for loans that are less than 80% of the value of a property.
The other way you can get a lower payment is to change the term of the cash flow ARM from 30 years to 40 years.
If you get this rate the minimum payment on a $400,000 mortgage is $1,011 for a 40 year term.
This is substantially lower than a regular payment or an interest only payment.
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How Big House Can I Buy
Mortgage Loans
Getting 100% financing is quite common these days for borrowers.
This loan option allows people to buy very expensive homes. Even closing costs can be covered as part of the purchase, so people often have to invest very little to get a home.
Here is how to decide how much house you can afford.
Payment Size
You can use a free online mortgage calculator to determine the loan payment size at different purchase prices.
You will need to know the loan amount, the interest rate, and the loan term in years.
Take an estimated loan amount. The loan for 100% financing is usually broken into two different loans of 80% and 20%.
This means that 100% financing on a $100,000 would be broken down into two separate loans of $80,000 and $20,000.
The first 80% loan you can take a guess at being somewhere around 6%-8% interest rates.
The final 20% loan can be assumed to be around 10%-13%.
For a loan term you may use 30 years. Keep in mind that 40 year terms and 50 year terms are now available.
A longer loan term will mean a smaller monthly payment for a comparable loan size and interest rate.
Add up both of these payment numbers, and factor in what you estimate your monthly property tax and hazard insurance will cost.
As an example, assume these total costs are $1,800 per month.
You will need to compare this amount to your total pretax income. Many lenders do not like to see your total home payment to be no more than around 30% of your pretax income. In this case the monthly pretax income needed will be $6,000. Keep in mind that you also likely have additional monthly debt payments, such as credit card and car payments. Add up these monthly payments. Your total debt burden, including your house payments, should not be more than 40% of your income.
Some lenders allow a total debt load of up to 55% of your pretax income.
If you do this online with a mortgage calculator the process is fairly easy.
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