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Updated almost 3 years ago on . Most recent reply

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Griffin Pratt
  • Wholesaler
  • St. Augustine, FL
24
Votes |
36
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ARM loan smart for investment prop in todays economic climate?

Griffin Pratt
  • Wholesaler
  • St. Augustine, FL
Posted

I'm a St. Pete based RE agent looking at purchasing rental property in the area. I'm having trouble making the numbers work due to the surge in home values following the pandemic paired with higher interest rates is making cashflow difficult. (although I've still been able to find a few diamonds in the rough). I am considering alternative financing options to help decrease mortgage payments and allow my margins to hit my targets. One such financing option that caught my eye is an Adjustable Rate Mortgage (ARM). My general plan would be to utilize a 5, 7 or 10yr ARM for the temporary lower interest rate and then sell/1031 or refi and lock in a lower fixed rate based on market conditions at that time.

My questions are, does this seem like a sound strategy and, while I have a general understanding of how the 3/5/7/10yr ARMs work, are there major or hidden drawbacks to be concerned about when financing with an ARM? Will I be able to refi as easily as I'm thinking or ae there hidden conditions that can prevent flexibility at the end of the fixed-rate period? Open to any advice, good or bad, from anyone with some experience financing with ARMs!

Thanks BP family,

Griffin

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Robin Simon
#3 Private Lending & Conventional Mortgage Advice Contributor
  • Lender
  • Austin, TX
4,423
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Robin Simon
#3 Private Lending & Conventional Mortgage Advice Contributor
  • Lender
  • Austin, TX
Replied
Quote from @Jon Puente:

Hey Griffin,

You may absolutely use an Adjustable Rate Mortgage to purchase a rental. The only drawbacks right now is that lenders are not really being as aggressive on ARM products as they used to be. Meaning, a 30YR fixed often can get you the same rate as a 5YR or 7YR ARM, depending on the deal (credit, DTI, loan size, etc...)

A 10YR ARM will never beat a 30YR fixed with rates the way they are, so that would be off the table. Most lenders do not have a prepayment penalty on ARMs, but that would be something to find out upfront because that could be expensive if they do.

ARMs are a solid way to buy properties and are much more popular in the JUMBO space because of large loan amounts. The biggest thing I would be doing is negotiating seller credits in any scenario and using those to buy down your rate. I think that will have more affect on your than going ARM vs Fixed.

Hope this helps and great question! 


This is accurate. The market expects rates to come back down fairly quickly (no more than a year or two) so that is generally being reflected in ARM vs. 30-year fixed pricing, your just not getting much benefit in rate to take on the ARM risk

  • Robin Simon
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