Do you know that your income will increase in the future?  If you are like many people with steady career growth and income increases you may qualify for the FHA Section 245 loan program.  This program allows an individual or family to purchase a home based future rising incomes while paying smaller mortgage payments in the beginning of the mortgage term.  Depending on the payment plan selected, qualifiers for this loan program must understand that while their monthly mortgage payments start small, payments will increase substantially each year for up to 10 years.

What is the Graduated Mortgage Plan?

FHA approved mortgage lenders can grant loans to individuals and families with low to moderate incomes that may not otherwise qualify for a conventional loan.  The Graduated Mortgage program helps keep initial costs low and allows homebuyers a chance to purchase a home sooner than they would be able to under conventional loan programs.  Borrowers are offered five different graduated payment plans, which they can tailor to suit their future income expectations.  These plans may also lower some of the initial upfront and monthly costs of purchasing a home.

Three of the plans allow for substantially lower initial mortgage payments with increases of 2.5 percent, 5 percent, or 7.5 percent over the first five years.  The other two plans allow for 2 to 3 percent increases over 10 years.  Once all the increases have been placed for the five or the ten-year programs, the mortgage payment will remain the same for the remainder of the loan.  Graduated payment homebuyers need to consider that the overall lifetime interest paid will be greater than that of a stable payment loan.

It is important to understand that the interest rate does not increase during the life of the mortgage, just the amount of monthly payments.  Additionally, building equity in a home takes longer with lower initial payments.

A housing rescue bill aimed at helping distressed homeowners recently passed a test vote in the Senate. 60 votes were needed to close the debate on the bill and it received 83. However, problems still loom with the president threatening a veto over certain sticking points. In particular, the White House is opposed to giving $4 billion dollars to states to purchase properties that have been foreclosed upon. President Bush sees this as a way to help out the banks that financed these risky loans and not the borrowers who have been hurt by predatory lending practices.

The bill would affect the FHA by allowing it to back $300 million worth of loans for approximately 400,000 who would not normally meet the FHA standards. Opponents of this part of the plan argue that this lowering of the FHA’s already relatively lenient standards will only lead to more foreclosures in the future and could potentially result in the demise of the FHA. Proponents argue that, at the current time, this is the best solution for the hundreds of thousands of homeowners in trouble.

Because of the Congress’s Fourth of July recess (July 1^st – 10^th) progress on the bill is unlikely until mid- to late-July.

Below is a continuation of our focus on traditional refinancing options for consumers. Please be advised that new legislation has caught steam in Congress that would put open up an ability to refinance through new initiatives with FHA loans to millions of Americans.

Fixed Rate Mortgage—Borrowers who are preparing to permanently stay in their home often choose a fixed rate mortgage to refinance. The most popular terms are 30-year or 15-year fixed. Borrowers who like stability and no surprises tend to go for fixed rates because the rates are steady.

One drawback, however, is that mortgage payments will go up if borrowers refinance an existing loan for a shorter term. On the other hand, borrowers will ultimately end up paying more principle and less interest, which means that the equity of the home starts to add up.

Adjustable Rate Mortgages, or ARMs—In this option, the interest rate of the mortgage adjusts over a period of time, eventually resulting in a higher mortgage monthly payment. An ARM is a great refinancing option for borrowers that foresee an increase in income, if the fixed rate is too high, or for those planning on living in their home for a short period of time.

The interest rates for ARMs are usually lower than those carrying a fixed rate. Some choose ARMs because they usually do not have to pay prepayment penalties if they choose to refinance in the future. However, some struggle with their ARMs if interest rates drive their mortgage rates to significantly increase in a short time period.