Like any American consumer product, mortgage loan products can become trendy.  In 2005 and 2006, the Pay Option ARM was the coolest loan product on the planet.  First time homebuyers across the country were lining up for 80-20% purchase loans with teaser rates starting at 1%.  Who wouldn’t want 1% mortgage rate?  Of course it was too good to be true as borrowers saw the negative amortization make their mortgage balances rise. 

For the first time homeowners saw their mortgage balance larger than their mortgage limit and like a revolving credit card, it killed their credit scores.  Borrowers found themselves stuck with an adjustable rate mortgage because there were no refinance loan programs available for sub 600 credit scores with no equity.  Mortgage companies went out of business and homeowners began defaulting on their home loans like never before.  Foreclosure ratios broke records in 2007 and in 2008 more foreclosures records will be broken. 

Along comes the new FHA mortgage refinance…This government mortgage is as old as the great depression, but has with stood the test of time.  In 2007 the FHA Secure and the 95% Cash Out Refinance was introduced by HUD.  In 2008 Congress finally passed the economic stimulus package that mandated increased loan limits across the country.  The raised FHA mortgage loan limits are helping borrowers refinance their 1st and 2nd mortgages into a better payment that they can afford. 

FHA mortgage loans differ from option ARMs greatly.  FHA loan terms are calculated with simple interest and provide a hedge against inflation because they are fixed for 15 or 30-years and there is no pre-payment penalty.  Option ARM loans are calculated with negative amortization as the interest deficit is added to the principal balance and once the loan to value has reached 115% or 120% the payment rests to the fully indexed payment that carries an adjustable interest rate.  After a few years, borrowers with option ARMs have reported payment hikes that doubled their monthly payments.  FHA loans are not the new Option ARM’s!  If you have a variable interest rate mortgage, consider refinancing with a FHA loan featuring a fixed rate for 30-years.

FHA Mortgage Loans remain the focal loan for mortgage lenders nationally. Jeff Moran is contributing finance writer who has experience with companies like Countrywide, Lennox, Nationwide and CFB Loan Services.