Advertiser Disclosure

Mortgage

Loan Options for Manufactured, Mobile and Modular Homes

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

According to the Manufactured Housing Institute, about 22 million people in the United States live in manufactured homes. With numbers like that, it doesn’t make sense that these homes are still so misunderstood.For example, many people think that manufactured homes, mobile homes and modular homes are one and the same, but that’s not true at all. There are key differences that set the three apart and affect financing options.

Read on to learn what these differences are so that you can find the right loan for you.

Manufactured, mobile and modular: What are the differences?

Manufactured homes

Manufactured homes are built in manufacturing plants and then taken to their plot of land via a permanent chassis that’s attached to the bottom of the home. They also are built in accordance to Manufactured Home Construction and Safety Standards, a safety code set by the Department of Housing and Urban Development, or HUD.

Mobile homes

“Mobile homes are manufactured homes, but the term is outdated,” said Alberto Pina, the co-founder of Braustin Mobile Homes in San Antonio, Texas.

“In 1976, the government decided to get involved in the regulation of mobile homes for people’s safety. That’s when the HUD Code — the National Mobile Home Construction and Safety Act — became effective. It’s also when mobile homes started being called manufactured homes.”

Modular homes

Like manufactured homes, modular homes are also partially constructed in a factory. However, they’re transported to the plot of land in pieces and then they’re put together on-site. Modular homes also have permanent foundations and, rather than conforming to a single HUD Code, they also have to meet he same local, state and regional building codes as traditional houses.

Financing a manufactured home

Retail installment contracts

Retail installment contracts are commonly used for manufactured homes and are slightly different from a traditional loan. In this case, rather than going to a bank or lender to get a loan for funding to buy your home, you would contract directly with the dealership from which you’re purchasing your home.

The retail installment contract is the official agreement stating that you agree to pay the dealer back over time, plus interest. However, afterward, the dealer is free to sell the contract to another lender or third party.

Title 1 loans provided by FHA-approved lenders

Title 1 loans are the Federal Housing Administration’s answer to manufactured homes. With this program, the FHA encourages approved lenders to lend to consumers by insuring the loan in case of default.

It’s used for used for the purchase (or refinancing) of a manufactured home, of a lot on which the manufactured home will be placed or a manufactured home and lot in combination, as long as the home is being used as a primary residence.

Depending on which option you choose, there will be different limits on your loan amount and loan term. They are as follows:
Maximum loan amount

  • Manufactured home only: $69,678
  • Manufactured home lot: $23,226
  • Manufactured home and lot: $92,904

Maximum loan term

  • 20 years for a loan on a manufactured home or on a single-section, or single-wide (the newer term for single-section) manufactured home and lot
  • 15 years for a manufactured home-lot loan
  • 25 years for a loan on a multi-section manufactured home and lot

Interestingly, Title 1 loans can also be used to buy a home that will be placed on a leased plot of land, provided that the initial lease term is at least three years and that the lease states that the homeowner will be given at least 180 days’ notice before the lease ends.

However, because the home is manufactured, it must meet certain requirements in addition to FHA’s normal qualifying standards. They are:

  • The home must be built after June 15, 1976
  • The red HUD label must be affixed to each section
  • Minimum size to be financed is 400 square feet
  • The home must be permanently affixed to a foundation that meets FHA standards
  • The home must meet the Model Manufactured Home Installation Standards
  • The lot where the manufactured home will be set must be designated or approved

“Buyers like this type of loan because it allows them to get a low interest rate and low down payment, as well as some of some of the sitework done, such as the base pad, skirting, decking and utilities and sewer system,” Pina said.

VA loans

If you’ve served in the military, you’re eligible for a loan through the Department of Veterans Affairs and, fortunately, you can use that benefit to buy a manufactured home. Qualifying for a VA loan for a manufactured home is much the same as using a VA loan to buy a conventional home. You’ll need to provide proof of your financials, as well as a Certificate of Eligibility, which verifies that you served.

However, some of the loan terms are different. For example, you cannot finance more than 95% of a manufactured home, even though you can finance up to 100% of a traditional home.

The term lengths that are offered for these loans are also different. They are as follows:

  • 15 years and 32 days for a lot purchase if you already own the home
  • 20 years and 32 days for a single-family manufactured home and lot
  • 23 years and 32 days for a double-wide manufactured home
  • 25 years and 32 days for a double-wide manufactured home and lot

Fannie Mae MH Advantage mortgage

The Fannie Mae MH Advantage program offers flexible underwriting standards and reduced pricing for manufactured homes that meet certain construction requirements. It’s a 30-year loan that allows borrowers to finance up to 97% of their loan-to-value (LTV) ratio.

As far as what requirements need to be met in order to qualify for the loan:

  • The home must be 12 feet wide and have at least 600 square feet
  • It must be built on a permanent chassis and be installed on a foundation
  • It must be titled as real estate
  • After being appraised, it must receive an “MH Advantage Sticker” that signifies that it has certain features similar to traditional homes

Single-wides, today more commonly referred to as single-section homes, are not accepted in the Fannie Mae MH Advantage program. If you were planning on buying one, or have a manufactured home that doesn’t otherwise meet the MH Advantage qualifying requirements, you can look into their standard manufactured housing program.

Chattel loans

Chattel loans are a common way to finance manufactured homes that sit on a leased lot. Because the land is leased, the home cannot be affixed to the ground, which makes it much harder to qualify for a traditional mortgage.

With a chattel loan, the manufactured home itself is treated as collateral for the loan. Initially, the lender will take ownership of the home. Then, once you finish paying it off in full, ownership is transferred to you.

Financing a mobile home

It would be difficult to get financing on a true mobile home, Pina warned.

Remember, the term “mobile home” refers to manufactured homes that were built before 1976, when the National Mobile Home Construction and Safety Act was released. The difficulty comes from the fact that the construction of these older homes was totally unregulated.

In order to receive financing, many lenders require that the mobile or manufactured home meets HUD’s standards. However, even if you make improvements to an older mobile home, HUD will not issue you a sticker signifying compliance.

“Fortunately,” Pina said, “you’re not buying one of these for more than $5,000 or $10,000, so the need to finance the purchase is rare.“

Financing a modular home

“Modular homes have the same loan options as what folks would call a traditional home,” Pina said. With that in mind, below are some of the most common options:

Construction-to-permanent loans

“Construction-to-permanent loans can be used In either manufactured or modular housing transactions,” Pina said.

Construction-to-permanent loans are unique in that they provide funds for the construction of the home upfront, but after construction on the home is completed, the balance is converted into a permanent loan, or traditional mortgage.

Traditional FHA loans

Because modular homes are secured to a concrete foundation, they’re eligible for a traditional FHA loan. This means that all the usual borrower requirements apply:

  • You must have a debt-to-income (DTI) ratio of less than or equal to 43%
  • If you have a credit score of 580 or higher, you can put as little as 3.5% down
  • If you have a credit score between 500 and 579, you must put at least 10% down
  • The home must be your primary residence
  • You must carry FHA mortgage insurance, or MIP
  • You must be able to provide proof of employment

Where to find a lender

Not all lenders work with manufactured or modular homes. But, luckily, there are many great tools at your disposal that can help you find the right lender. In particular:

  • HUD has a search tool that allows you to filter approved lenders by your area.
  • The Manufactured Housing Institute can provide you with a list of lenders and manufacturers in your state.
  • Fannie Mae also provides a list of suggested manufactured housing lenders.

Though the loan options for manufactured, mobile and modular housing are a bit different than they might be in a traditional housing scenario, qualifying for one is a small price to pay for the affordable living that these homes can provide.

If you’re interested in one of these homes, do your research. Look into some of the loan options above, talk to lenders that specialize in manufactured housing and get a few loan estimates. It won’t be long before you find the loan program that’s right for you.

This article contains links to LendingTree, our parent company.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Tara Mastroeni
Tara Mastroeni |

Tara Mastroeni is a writer at MagnifyMoney. You can email Tara here

TAGS:

Compare Mortgage Loan Offers for Free

Home Purchase Quotes

Home Refinance Quotes

(It only takes 3 minutes!)

NMLS #1136 Terms & Conditions Apply

Advertiser Disclosure

Featured, Mortgage, News

7 Reasons Your Mortgage Application Was Denied

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Rejection isn’t fun under any circumstances, but it can be especially frustrating when you’re trying to buy a home. If your mortgage application was denied, know that you aren’t alone. Nearly 11% of mortgage applications were denied in 2017, according to the latest available data from the Consumer Financial Protection Bureau (CFPB).

Reasons for a mortgage application denial usually fall into a handful of categories, including credit history, employment history or property issues. Regardless of what the problem is, you’ll walk away from the experience learning why you’ve been denied and can use that information to work toward a favorable outcome in the future.

Below are seven of the most common reasons your mortgage application might not be approved, according to the CFPB — and then how to move forward.

1. You have a history of late payments

Before you can be approved for a mortgage, your lender needs to make sure you’d be able to repay the loan. Your income and how well you manage your existing debt help determine whether you’ll satisfy your mortgage payments every month, but so will your payment history. Failing to pay your electric, internet or other recurring bills on time will eventually affect your credit reports and scores.

Why this matters

Your payment history makes up the largest chunk of your credit score — 35% — and is listed on every debt-related account included on your credit report. Your credit score factors in the following details about late or missed payments, according to the FICO credit scoring system:

  • How late you were
  • How much you owe
  • How recently you were late
  • How many late or missed payments you have

Other negative information such as a bankruptcy or an account in collections are also factored into your score and will catch your lender’s attention.
If you have a credit history filled with late payments, this indicates to your lender that you struggle with maintaining on-time payments and are more likely to continue making late payments while repaying a mortgage.

How to avoid this issue: Maintain a track record of on-time payments for all your existing debt before and after you apply for a mortgage. If you have a few late payments on your credit report, keep in mind the further removed you are from your late payments, the less impact they’ll have on your credit score.

2. Your job status has changed

Rapidly switching employers and being in-between jobs can be grounds for an application denial.

Why this matters

Mortgage lenders like to see evidence of steady employment, especially for the last two years. They’ll usually verify this by reviewing your pay stubs and W-2s. If your employment history is spotty and doesn’t demonstrate that you’ve been maintaining consistent employment, you’re considered a higher risk and likely won’t be approved.

How to avoid this issue: Limit your job changes before you apply for a mortgage. A good rule of thumb is have had no more than three employers in the last two years and no time between those jobs where you were unemployed. Additionally, avoid any job changes after applying for a mortgage, as this could derail the process.

3. Your bank account has some red flags

Lenders will request at least the last few months of statements from your banking institution to see how your finances are holding up. Because they’re closely reviewing those documents, any suspicious-looking activity will present some red flags. Suspicious activity might include, but isn’t limited to:

  • Using multiple P.O. boxes or frequently changing addresses.
  • Conducting wire transfers to and from places known for their tax haven status or terrorism affiliation.
  • Making large cash payments from sources that typically aren’t associated with cash-based transactions.
  • Using money orders that are sequentially numbered.

Why this matters

Combing through your financial profile is part of the mortgage lending process. If you frequently overdraft your checking account, that won’t reflect well on your reputation as a prospective borrower. On the other end of the spectrum, having large deposits that aren’t accounted for can also cause problems.

You’ll need to verify every income source you want counted as part of your application, said Bruce McClary, vice president of communications for the National Foundation for Credit Counseling in Washington, D.C. Any side hustles you have need to be documented and verified if you want that information factored into your ability to afford the mortgage. One way to verify income is by providing your lender with pay stubs or W-2s from your supplemental income sources.

“If you’re relying on every penny, that can really be a roadblock,” McClary said.

How to avoid this issue: Keep track of all your income-related documents and provide them to your lender when they’re requested.

4. You omitted information on your application

Don’t try to outsmart your mortgage lender by withholding information that is pertinent to your loan application, such as neglecting to mention alimony payments or an unpaid federal tax debt. And even if you do so unintentionally, it might be too late to correct it once it’s discovered.

Why this matters

Your loan officer should carefully review your application to make sure it’s filled out completely and accurately. A small error like missing a zero on your income or accidentally skipping a section could mean losing your dream home.

There’s also the chance you forgot to include information that the underwriter caught later in the more extensive screening process, such as money owed to the IRS.

How to avoid this issue: Disclose all of your debt, judgments and other financial-related details to your loan officer upfront. Otherwise, they may not be able to help you if it comes up and disqualifies you later on.

5. You recently opened a new credit account

One of the main ways homebuyers can self-sabotage their chances at being fully approved for a home loan is by making decisions — such as opening a new credit card or financing a new vehicle — that affect their credit profile, after getting an initial green light from their lender in the form of a mortgage preapproval.

A preapproval is conditional and based on where your credit reports, credit scores, income and overall financial picture stand at the time the preapproval was granted. Any changes you make to your finances can prevent you from buying a home.

Why this matters

When you add a new set of debt to your plate, that increases your debt-to-income (DTI) ratio. Your DTI ratio is the percentage of your gross monthly income that is used to repay debt. In most cases, mortgage lenders like to see a DTI ratio of 43% or less. Adding any type of credit account will jeopardize your DTI ratio and potentially push you into denial territory.
“Everybody focuses so much on the credit report, but the other question is: Are you financing a home that you can actually afford?” McClary said.

How to avoid this issue: Don’t make any financial decisions that will result in an inquiry on your credit reports and an increase in your debt load. Practice this for 6-12 months before you start the homebuying process, McClary advised. You’ll also need to continue this practice until after you get your house keys. Additionally, try to find ways to boost your income to pay off debt.

6. You don’t have enough cash to close

Borrowing a mortgage will cost you more than just your monthly mortgage payment. In most cases, you’ll have a required down payment and closing costs to pay for. If you don’t have proof that you can cover those costs, your application may be rejected.

Why this matters

Your mortgage lender will want you to have some skin in the game for your home purchase, which would be your down payment. There are also the closing costs you’ll be charged for taking out a mortgage.

During the approval process, your lender will request that you provide proof of funds to close on your loan. Some examples of proof include bank statements, retirement account statements and gift letters with the donor’s proof of funds — in cases when a loved one is helping you meet your “cash to close” amount. Be sure your gift money is coming from an acceptable source, however.

Failing to provide the necessary documents can lead to a mortgage denial.

How to avoid this issue: Save aggressively for your down payment and closing costs. It’s possible to qualify for a mortgage with as little as 3% down, depending on your credit score. Your closing costs can range from 2% to 5% of your home’s purchase price.

If you’re borrowing or withdrawing from a retirement account, supply documentation from your plan provider that shows you qualify to do so, along with statements that verify you have the funds available to use for your home purchase. And if you need some extra help, consider a down payment assistance program.

7. Your home appraisal doesn’t match up

Getting a full mortgage approval is also contingent upon having the home appraised. Any problems that come up during the appraisal process can stop you from getting your house keys.

Why this matters

A home appraisal is an unbiased estimate of a home’s value. Your mortgage lender will more than likely require an appraisal for the home you’re trying to buy in order to verify that the purchase price checks out. If the appraisal aligns with the sales price or is slightly higher, no worries there. But if the appraisal is lower than the sales price, your lender might deny your application.

How to avoid this issue: If you have the financial capacity to do so, you can make up the difference in cash. You could also try negotiating a lower sales price with the home seller.

How to move forward after a mortgage denial

Once you’ve been denied, it’s time to figure out how to work toward eventually getting approved. Keep these tips in mind on how to move forward.

  • Find out why you were denied. Mortgage lenders are required to give you an explanation for why they denied your mortgage application if you submit a request for that information in writing, according to the CFPB. They must also provide you with a copy of the credit report that factored into your denial.
  • Improve your circumstances. Whether it’s a high DTI ratio, too short of an employment history or another common setback, take some time to correct those issues and better position yourself for mortgage approval in the future.
  • Consider housing counseling. In cases where you were denied for credit or income-related reasons, McClary suggests reaching out to a nonprofit housing counseling agency for help addressing those issues.

Everyone’s timeline is different for when they should apply again, so be sure to check with your lender or a housing counselor for guidance on next steps.

The bottom line

Being denied for a mortgage can be a discouraging experience, but it doesn’t mean all hope is lost for your goal of homeownership.

Once you’re clear on why you were denied, you can make the necessary changes so you’re not rejected the next time around.

“The more you do leading up to the loan application to make sure that you check and double-check every step, then the easier the actual homebuying process will be,” McClary said, “because that financing piece is locked down and you’ve addressed all the issues that could potentially be roadblocks.”

Here’s what you need to know about the most important factors to getting approved for a mortgage.

This article contains links to LendingTree, our parent company.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Crissinda Ponder
Crissinda Ponder |

Crissinda Ponder is a writer at MagnifyMoney. You can email Crissinda here

TAGS: , , ,

Compare Mortgage Loan Offers for Free

Home Purchase Quotes

Home Refinance Quotes

(It only takes 3 minutes!)

NMLS #1136 Terms & Conditions Apply

Advertiser Disclosure

Mortgage

The 5/1 ARM: What Is It and Is It for Me?

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

5/1 ARM mortgage
iStock

Homebuying involves a lot of decisions. You choose your neighborhood, your home, your mortgage program and your down payment. But you’ll also need to decide on the structure of your interest rate — fixed or adjustable.

While most people prefer a fixed-rate mortgage, there is a market for adjustable-rate loans. Nearly 7% of all loans originated in April 2019 were adjustable-rate mortgages, according to Ellie Mae’s latest Origination Insight Report.

One common adjustable-rate mortgage is known as a 5/1 ARM. It has an initial fixed rate for five years before the interest rate starts adjusting. The rate can change every year for the remaining life of the loan.

An adjustable-rate mortgage can be a good way to get a better initial interest rate, usually lower than a traditional 30-year fixed-rate loan. But before you dive in to an adjustable-rate mortgage application, you’d better know how the changing interest rate will affect what you pay.

Here’s a guide to how 5/1 ARMs work, how they differ from fixed-rate mortgages and their pros and cons.

What’s a 5/1 ARM?

Before defining a 5/1 ARM, we should first define an adjustable-rate mortgage, or ARM. An ARM is a type of mortgage that has an interest rate that changes, or adjusts, multiple times over the life of the loan.

Different types of adjustable-rate mortgages have interest rates that change at different intervals and are limited to certain levels of increase each time. Most ARMs start out with a fixed interest rate for several years and eventually transition to a period with an variable interest rate for the rest of the term, usually a total of 30 years.

In the case of a 5/1 ARM, the mortgage rate is fixed for the first five years. That’s what the “5” refers to. Then, the mortgage can adjust each year thereafter for the remaining 25 years of the loan term. That’s what the “1” refers to, since the rate changes after one year.

Since the 5/1 ARM is a blend of a fixed-rate and adjustable-rate loan, it can also be known as a hybrid mortgage.

How 5/1 ARM interest rates adjust

Adjustable-rate mortgages are less predictable than fixed-rate loans and are directly impacted by economic factors after you’ve started repaying the loan.

Changes to the interest rate on an adjustable-rate mortgage are based on an index, which is a benchmark interest rate that reflects general market conditions, according to the Consumer Financial Protection Bureau. The most common index used for mortgages is the one-year London Inter-Bank Offer Rate, or LIBOR for short.

Mortgage lenders use the index and then add on a fixed margin to determine your interest rate. A margin is a set number of percentage points added on to the index. So, if the one-year LIBOR is 2.65% and your lender’s margin is 2.15%, your mortgage rate, or “fully indexed rate,” at that time would be 4.8%.

Interest rates on 5/1 ARMs typically start out lower than those for fixed-rate mortgages. As of mid-May 2019, the average 30-year fixed-rate mortgage was 4.07%, while the 5/1 ARM was 3.66%, according to Freddie Mac’s Primary Mortgage Market Survey.

Let’s take a look at how a 5/1 ARM stacks up against a 30-year fixed-rate mortgage after the first five years. We’ll use a hypothetical $250,000 house and assume the buyer is putting down 20%, which means they’ll borrow a $200,000 mortgage.

 

5/1 ARM

30-Year FRM

Interest rate

3.7

4.1

Monthly payment
(Principal and interest)

$920.57

$966.40

Interest paid after five years

$6,639.60

$7,406.94

Principal paid after five years

$4,407.19

$4,189.82

As shown above, because the 5/1 ARM has a lower interest rate during its fixed-rate period than the 30-year fixed does, the buyer would pay $767.34 less in interest after five years and pay down $217.37 more of the principal balance of the loan. The results could quickly reverse once the 5/1 ARM’s interest rate begins adjusting, however.

Let’s look at the 5/1 ARM (on a $250,000 home with a $50,000 down payment) after two interest rate adjustments to understand how the changes can impact the monthly mortgage payment.

 

Adjustment #1

Adjustment #2

Index

2.65%

2.8%

Margin

2.15%

2.15%

Interest rate (Index + margin)

4.8%

4.95%

Monthly payment (Principal and interest)

$1,049.33

$1,067.54

In the above scenarios, the 5/1 ARM interest rate jumps significantly higher than 3.7%. By the time the rate jumps to 4.8% and again to 4.95%, the monthly payment increases by nearly $130 and $150, respectively.

Pros and cons of 5/1 ARM

As with any financial product, there are benefits and drawbacks. Consider the following pros and cons of borrowing a 5/1 adjustable-rate mortgage.

Pros

  • ARM interest rates are usually lower than 30-year fixed-rate mortgages (and sometimes 15-year fixed-rate mortgages) for the first five years, which means you’ll pay less in interest during that time.
  • Monthly mortgage payments are also typically lower in the first five years, thanks to the lower interest rate.
  • There is a limit to how high your interest rate can increase over the life of your loan, which is called a lifetime adjustment cap. The cap is typically five percentage points, but your lender’s cap could be higher, according to the CFPB.

Cons

  • After the first five years of a 5/1 ARM, the interest rate can adjust each year and is not predictable. Although there’s a cap on how much your rate can increase the first time it adjusts, it can still be significantly higher than the fixed rate you’re losing.
  • Because your interest rate adjusts over the life of your loan, so does your monthly mortgage payment. If a higher mortgage payment would greatly impact your budget, this could cause you some affordability problems.
  • If you want to keep a fixed interest rate, you must refinance into a fixed-rate mortgage, which comes with closing costs and other fees. You must also qualify for a refinance in order to get out of your existing mortgage.

A 5/1 ARM might work for you if …

“For certain people, like first-time homebuyers, 5/1 ARM mortgages are very useful,” said Doug Crouse, a senior loan officer with nearly 20 years of experience in the mortgage industry.

Homebuyers in the following scenarios could benefit from a 5/1 ARM:

  • First-time buyers who plan to move within the first five years of owning their home.
  • Buyers who plan to pay of their mortgage very quickly.
  • Buyers who are borrowing a jumbo mortgage.

Crouse explained that with some first-time buyers, the plan is to move after a few years. This group can benefit from lower interest rates and lower monthly payments during those early years before the fixed rate changes to a variable rate.

Mindy Jensen, a real estate agent and community manager for BiggerPockets, an online community of real estate investors, agrees. “You can actually use a 5/1 ARM to your advantage in certain situations,” she said.

A 5/1 ARM could work well for someone who wants to aggressively pay down a mortgage in a short amount of time, Jensen explained. After all, if you know you’re going to pay off your loan early, why pay more interest to your lender than you have to?

“The lower initial interest rate frees up more money to make higher principal payments,” Jensen said.

Another group of people that can benefit from 5/1 ARM are those who take out or refinance jumbo mortgages, Crouse added.

For these loans, a 5/1 ARM makes the first few years of mortgage payments lower because of the lower interest rate. This, in turn, means that the initial payments will be much more affordable for higher-end properties.

Plus, if buyers purchased these more expensive homes in desirable areas where home prices are projected to rise quickly, it’s possible the value of their home could soar in the first few years while they make lower payments. Then, they can sell after five years and hopefully make a profit.

However, keep in mind that real estate is a risky investment and nothing is guaranteed.

A 5/1 ARM isn’t right for you if …

For homebuyers who plan to stay put for longer than five years, Crouse and Jensen share the sentiment that a 5/1 ARM might not be as beneficial for them.

Homeowners should also consider whether they want to be landlords in the future, Jensen added. If you decide to move out of your home but keep the mortgage and rent out your home, a 5/1 ARM may not serve you.

Additionally, if you think there’s a chance you might not be able to refinance out of a 5/1 ARM by the time your interest rate starts adjusting, you might consider a fixed-rate mortgage instead.

The bottom line

The 5/1 adjustable-rate mortgage can offer you the benefits of a lower interest rate and monthly payment, especially in the first five years of the loan. This alone may make it an attractive product for homebuyers.

Still, you can’t predict how high your interest rate can go when it transitions from fixed to variable, and that’s a budgeting concern you’ll need to consider when weighing your home financing options.

If after reading this guide you think a 5/1 ARM might be right for you, keep this list of questions in mind as you gather mortgage quotes from lenders:

  • How long do I want to live in this house?
  • Will this house suit my family if my family grows?
  • Is there a chance my job will transfer me elsewhere?
  • How often does the rate adjust after five years?
  • When is the adjusted rate applied to the mortgage?
  • If I want to refinance in five years, how much might that cost me?
  • How comfortable am I with the uncertainty of a variable rate?
  • Do I want to rent out my house if I decide to move?

Once you’ve filled in the answers to the above questions, your next step is to understand the minimum mortgage requirements for the available loan programs.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Cat Alford
Cat Alford |

Cat Alford is a writer at MagnifyMoney. You can email Catherine at [email protected]

Crissinda Ponder
Crissinda Ponder |

Crissinda Ponder is a writer at MagnifyMoney. You can email Crissinda here

TAGS: , ,

Compare Mortgage Loan Offers for Free

Home Purchase Quotes

Home Refinance Quotes

(It only takes 3 minutes!)

NMLS #1136 Terms & Conditions Apply