Also, with a FHA insured loan, down payments can be as low as 3 percent, allowing borrowers to finance the remaining 97 percent of the cost of the home through their mortgage.  FHA approved down payment grants are available as well.  Additionally, some or all of the closing costs may be financed into the mortgage, further reducing the up-front costs.

The graduated loan program is open to any family or individual who expects their annual income to rise substantially over the next five to ten years.  However, borrowers must occupy the purchased home as their primary residence.  The Section 245 program is not available to investors.  Applications for the Section 245 graduated loan program must be made through FHA approved lending institutions.

The types of properties that are included under the Section 245 graduated mortgage plan include single-family homes, multi-family homes, manufactured homes, and some health related facilities. 

Many individuals and families do not qualify for typical conventional fixed-rate mortgages, especially young and low to moderate-income families.  In order to reduce the risk to a lender, FHA has developed creative methods that allow a lender to confidently approve home loans to those lesser-qualified individuals.  The Section 245 graduated loan program is one of those methods that can allow a family with continually increasing incomes to live in their own home sooner than they thought possible.

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.

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.

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.

·         Rate and Term Refinancing—Under this option, borrowers refinance the mortgage they currently have in order to get a better interest rate or loan term. The new interest rate will hinge on how much is being borrowed and the length of the loan term.   Borrowers often take advantage of this option when interest rates decrease.

·         Cash-Out Refinancing—This option entails extracting the equity borrowers have in their homes to pay down debt.  The money can be used how borrowers desire, but a common reason for cash-out refinancing is to make home improvements. Borrowers should be aware that cash-out refinancing is not without risks.  It can lead to higher monthly payments, and lenders sometimes charge higher interest rates because the borrower is taking out a new loan.