Mortgages & Creative Financing

Why I Just Switched 4 of My Mortgages From Adjustable to Fixed-Rate

Expertise: Business Management, Mortgages & Creative Financing, Landlording & Rental Properties, Real Estate Investing Basics, Personal Finance, Real Estate Deal Analysis & Advice, Commercial Real Estate, Personal Development, Real Estate News & Commentary
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Last Friday was a very interesting day for me, as I received a loan commitment on one of my larger investment properties. To some of you, this might not be a big deal, but for me it was huge. I was under the impression that I'd never get a bank loan again, especially with 30 properties in my own name. Sounds pretty bizarre compared to the recent lending environment, doesn't it?

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Change in Strategy

After 2005, things started to get weird, and you could feel the crash coming. By 2007, it was looking like one’s strategy needed to change. Up until that point, I was acquiring a lot of rental units, and I was taking advantage of all the easy mortgage terms available in the marketplace. In fact, I refinanced everything that I intended to keep long-term.

Since prices had jumped up so high, like I hadn’t seen in the previous 20 years, I even sold 10 of my buy-and-hold type of properties. Normally, I never would’ve done that, but some of these neighborhoods were getting really crazy numbers, and I think I was right to just get out while the getting was good. Some of these areas literally dropped more than 50% after the real estate crash.

By 2007, I had sold some of my tougher, older properties, where I had taken a lot of depreciation, and I started moving more into commercial real estate and notes. As for my remaining units, consisting of single-family residential and apartments, my properties were pretty much split down the middle between fixed-rate mortgages (6.5 to 8%) and adjustable-rate mortgages (3 to 4.5%), and they included some interest-only loans. (Please note: These adjustable rate loans were all on properties that still cash flowed even at the highest cap rates.)

Related: How I Bought, Rehabbed, Rented and Refinanced 14 Properties at Once

All of my excess cash flow was now being poured into safer buckets, including IRA accounts, insurance contracts, and notes that included private, hard money deals that I was doing for other real estate investors. But I had stopped buying buy-and-hold rentals due to the fact that the banks were not allowing cash out refinances anymore. In fact, with a self-employed guy like me, they literally stopped refinancing rentals to the point that the only option left for many investors was to fix and flip properties. It was at this time, I stopped buying residential rentals and switched to notes, because you don't have to qualify to buy a note; you just need the cash.

Hamp Program

Right before the crash, I wasn’t really sure what interest rates would do, but I felt I was ready regardless. Here we are coming up on 10 years later, and I almost wish all my rentals had adjustable-rate mortgages, because I saved and made a lot of money over the last decade.

So here's the irony. About two weeks ago, my lender called me up and asked me if I'd like to refinance four of my 10-year, interest-only loans that are about to reset in the next six months. I said I didn't believe I was eligible, and you know what the loan officer said? "This loan has no income or asset verification requirements, and there's no appraisal fee, either (105% LTV)." As you can imagine, I'm someone with a whacked out debt-to-income ratio anyway, so I was dancing in the streets.

Three of the properties do have to get an appraisal, but all four of these first mortgages are well covered with equity at this stage. So all the adjustable-rate mortgages that were originally 3 to 4.5% are now going to be fixed at approximately 4.5%. I asked the loan officer if there were any other programs, and she said I could even refinance to a 15 year or even another adjustable-rate mortgage.

Related: Why Property Managers Should Remind Clients to Refinance NOW

You're probably starting to think that I'm a little nuts, but if I was liquidating one of these properties in the next five years, the adjustable-rate mortgage would actually make sense, but I'm going with the 240-month fixed-rate mortgage since I'm getting closer to retirement age, and I plan to keep the properties long term.

With all the talk in the market about a pending increase in interest rates, one needs to keep their pulse on things to know when it's time to change strategies in order to seize the next great opportunity. So, should you be calling your mortgage broker about refinancing to a fixed-rate mortgage?

Investors: Have you heard about this option? Is it something you would consider?

Let’s talk in the comments section below!

Since 2007, Dave Van Horn has served as president and CEO of PPR Note Co., a $150MM+ company managing funds that buy, sell, and hold residential mortgages nationwide. Dave’s expertise is derived from over 30 years of residential and commercial real estate experience as a licensed Realtor, real estate investor, and private lender. In addition to his investments and role at PPR, Dave’s biggest passion is teaching others how to share, build, and preserve wealth. He authored Real Estate Note Investing, an introduction to the note investing business, helping investors enter the “other side” of real estate.
    Jim Spatzenfeld Investor from Buffalo NY & Sacramento CA
    Replied about 5 years ago
    What’s the name of the bank that offers this loan that has “no income or asset verification requirements”?
    Chris Rael Real Estate Investor from Jersey City, New Jersey
    Replied about 5 years ago
    Hi Jim, I’ve been trying to reach you regarding the deal submitted to Sprout Lending. What is the best contact number to reach you on? Chris
    Dave Van Horn Fund Manager from Berwyn, PA
    Replied about 5 years ago
    Hi Jim, I was utilizing a program that was apart of HAMP (the Home Affordable Modification Program) from a bank called Green Tree (who were then bought by Ditech). Many banks across the US have similar programs. Best, Dave
    Russell Brazil Real Estate Agent from Washington, D.C.
    Replied about 5 years ago
    An interesting tidbit is most retail buyers utilize a fixed rate mortgage. Yet most agents and mortgage brokers choose an ARM for their own properties.
    Dave Van Horn Fund Manager from Berwyn, PA
    Replied about 5 years ago
    Good point!
    James Gorman IV Investor from Gig Harbor, Washington
    Replied about 5 years ago
    Thanks for the info. in these posts. Does HAMP (the Home Affordable Modification Program) allow banks under this program to make multifamily property loans? And if so, any suggestions related to a few West Coast, or better yet banks operating in Washington State that might be good to do business with?
    Dave Van Horn Fund Manager from Berwyn, PA
    Replied about 5 years ago
    Hi James, I believe banks can implement HAMP on multifamily property loans, because I’m doing it on a two unit property right now. As for the specific West Coast question, I can’t say because my experience is dealing with large banks that work in many states but I think HAMP is available to any participating mortgage servicer in the US. Best, Dave
    Tai Abdul Investor from West Orange, New Jersey
    Replied about 5 years ago
    I am just approaching my 9th year on a10 year ARM and had done some research on the HAMP program. After some inquires it appeared that I wasn’t eligible. Any additional information would be greatly appreciated.
    Dave Van Horn Fund Manager from Berwyn, PA
    Replied about 5 years ago
    Hi Tai, There could be various reasons why someone isn’t eligible (income, credit, the current rules, etc) but I wouldn’t give up because I wasn’t eligible at first either. I would be persistent with asking and be patient for an answer. Best, Dave
    Blake C. Investor from Amarillo, Texas
    Replied about 5 years ago
    How would you go about this if you have the properties in an LLC with a commercial loan? I agree that its time to transition to fixed rate, but Im trying to figure out my strategy.
    Dave Van Horn Fund Manager from Berwyn, PA
    Replied about 5 years ago
    Hi Blake, Commercial loans are a bit different than residential but I would suggest reaching out to your commercial lender to see if they have any available fixed rate programs. Best, Dave
    Rick C. Rental Property Investor from Collingswood, NJ
    Replied about 5 years ago
    Hi Dave – Does this mean that the properties you reference are owned in your personal name?
    Shaun Reilly Landlord and Rehabber from Newton, Massachusetts
    Replied about 5 years ago
    While I think this is great for smart investors that don’t fit in the Fannie/Freddie check boxes, if they are bringing back easy “liar loans” the pending market correction might be coming up faster than people think. Fine by me, would welcome the glory days of 09-12 back again! 🙂
    Dave Van Horn Fund Manager from Berwyn, PA
    Replied about 5 years ago
    HI Shaun, Thank you for your comment. The loans that I had refinanced were Frannie/Freddie loans, which I had been current on for 10 years (since origination). It is essentially a retention program to keep ARMs from adjusting, and since I had never missed or made a late payment, there was little risk for the lender to refinance in order to keep my payment the same or lower it. Best, Dave