When a homebuyer wants to purchase a home with a large loan amount, another big number enters the picture: 20 percent.
For a conventional loan in Hampton Roads that exceeds $458,850, the loan program is considered a jumbo loan product that requires a 20 percent down payment (by most investor guidelines).
If you’re like many other homebuyers who don’t want to put down such a large sum of money, there’s good news. It’s called the smartARM. The “ARM” stands for adjustable rate mortgage, which is when the interest rate applied on the outstanding balance varies throughout the life of the loan.
As an example, the loan program is ideal for people who want to move up to their next home but don’t want to make a large down payment.
The smartARM allows you to lock or freeze the interest rate two ways:
- A 5/5 ARM in which the rate will be fixed for the first five years and then can adjust every five years.
- A 10/5 ARM in which the rate will be fixed for the first 10 years and then can adjust every five years.
It’s important to note ARMs do have caps on how much they can increase at every adjustment period and throughout the life of the loan.
What does it all mean? With the smartARM, the buyer only needs to put down 5 percent for a loan up to $750,000 and 10 percent for a loan above $750,000.
The smartARM requires no mortgage insurance and is available only for a primary residence and second homes. You can also use the program to refinance. You need a minimum 710 credit score and a 43 percent maximum debt-to-income ratio.
Here’s an example of a recent client who took advantage of the smartARM program. He wanted to buy a home worth $550,000 in Virginia Beach but did not want to put down the 20 percent.
He decided to go with the 5/5 smartARM, which allowed him to lower the interest rate and eliminate mortgage insurance. With these options, he now saves roughly $500 a month on his mortgage payment in comparison to a 30-year, fixed-rate mortgage. That’s a significant savings year over year.
If you want to buy a home with a large loan amount, keep in mind the smartARM program. It will help you avoid the 20 percent down payment and mortgage insurance. The result is an affordable monthly mortgage on the home you always wanted.