Fixed at 7.24% or an ARM on your next rental?

Question

If you’ve financed a rental in the past year, what did you pick, fixed or ARM, and why? If the Fed hikes again in December, would you make the same call? Give me the loan type, the fixed period, and the one reason. The best answers run in Thursday’s Investor Brief.

C.N. S. · Answer

My first and only investment property thus far was purchased in 2023 with a 15% down, 3/1 ARM at a 7.5% interest rate. I started tossing and turning at night in 2025 because I knew I needed to refinance into something fixed by July 2026. Not only were rates high then, I understood that my rate would run about 1% higher than the standard interest rate because I had an investment property and not a primary residence. Back around November last year, I managed to lock in a 6.99% fixed rate for a 30-year loan. What they don't tell you with an ARM is that before you can refinance, you need at least 20% equity in the property and money for closing costs. I prayed my property had gained the extra 5% equity necessary to meet my required LTV. Fortunately, it appraised higher than expected and I was able to wrap my closing costs into the loan. But, the whole ARM-then-refinance-to-a-fixed-interest-rate scenario is stressful due to the uncertainty. Especially when there are macro- and microeconomics outside of your control that can affect the rates. There's no guarantee the rates won't be higher when it's time to refinance. Never again in my life will I use an ARM.

David Krulac · Answer

@Garrett Brown Last year I bought 3 brand new single family detached house from a builder, who was offering below market interest rates. Two were 4.25% interest fixed for 10 years then variable after that. and the third mortgage was 4.75% interest fixed for 30 years with no balloon. Those 10 year fixed were the closest I ever got to a variable rate mortgage, and if the fixed term had been less than 10 years, I would have passed. This year I was offered 3.85% and 3.75% interest from new home builders. The ones I bought are in the rental portfolio and have positive cash flow and I plan on keeping them for a very long time, maybe forever. One of my kids has a brand new rental property, formerly owner occupied, that has 100% financing at 2.0% interest fixed for 30 years. I told them to never sell. But this year old dad sold a property that had a fixed 2.5% mortgage at 80% LTV. I was sorry to give up the mortgage, but got a full price offer on day one to the first buyer through the door, all cash, no contingencies and no inspections. It would have been really hard to turn that offer down.

Chris Seveney · Answer

what is your leverage? Low leverage you may be able to go ARM but for me I almost always go fixed to be able to know my costs.

Ray Williams · Answer

For a DSCR rental I'd lean fixed on anything I plan to hold past the first adjustment, but rate alone isn't really the decision. Three things usually matter more.

First, the prepay. Most DSCR loans carry a prepayment penalty, often 3 to 5 years. If the reason for picking an ARM is to refi when rates drop, you're stuck either way until the prepay burns off. Sometimes paying for a shorter prepay on a fixed loan buys more flexibility than the ARM does.

Second, how the lender qualifies the ARM. Some calculate DSCR on the start rate, some on a higher qualifying rate, and interest-only versions are often figured on the IO payment. If a deal only hits 1.0 on the ARM's start rate, it doesn't really work.

Third, the caps. A 5/6 or 7/6 ARM adjusts every six months after the fixed period, with limits on each adjustment and over the life of the loan. Run the payment at the lifetime cap. If it still cash flows there, the ARM is a reasonable bet.

On the Fed question: after the fixed period, most of these ARMs adjust off SOFR, which follows Fed policy pretty closely. Fixed rental rates track longer-term bond yields more than the Fed's next move. So a December hike would matter more for your reset five or seven years out than for the fixed rate you're quoted today. Keep in mind inflation will not go away any time soon and rates likely stay higher than what people are aware of and think today. Think 1970s , we have a $2T debt servicing (currently) dilemma and the Gov't has used tactics in the past to pay debt down that stings for the avg American.

Simon W. · Answer

On Muyees's numbers, the $180 a month ARM saving is $2,160 a year, but interest is deductible against the rent, so at a 24% bracket the after-tax saving is closer to $1,640. And if rates go up and it flips to $300 a month worse, you're out more than you saved.

One thing people miss is points. If you pay $3,000 in points on a refi, they're usually spread over the life of the loan, so on a 30 year note that's about $100 a year, not a big deduction up front. If you refi again early, the leftover usually gets written off then.

So I'd compare the two loans on after-tax cash flow, and I'd lean fixed unless you're sure you'll sell or refi before the reset.

Muyees Ayilara · Answer

Fixed for me on last one — 30-year DSCR fixed, 70% LTV.

Deal is Delray 33446 Monarch Lakes - $242k + $60k rehab, ARV $420k, rent $2100. I ran ARM vs fixed — ARM saved $180/mo year 1 but if Fed hikes Dec my refi math on pulling $126k out at $420k breaks.

I hold 5+ years, so I took fixed at 7.24% range for sleep-at-night. If I was flipping or 2-year refi, I'd do 5-year ARM to keep cash flow higher.

If Fed hikes in Dec I'd still pick fixed — my ROE is built on stable rent $2100 vs payment, not rate gamble.

Scarlett Hayes · Answer

I think it really comes down to the investment strategy and how long you plan to hold the property. A fixed rate gives you more certainty with monthly payments, while an ARM might make sense for someone with a shorter-term plan. Curious to hear what other investors are choosing as well.

Fixed at 7.24% or an ARM on your next rental?

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