ISO Lenders: 30 Yr Fixed or......10/1 Interest only ARM?
Member since 2023 · 50 posts · 16 votes
ISO Lenders: 30 Yr Fixed or......10/1 Interest only ARM?
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Jay HurstBusiness Member
Lender · Dallas, TX · Member since 2017 · 1k+ posts · 1k+ votesQuote from @Selina Giarla:
I have been striking out in underwriting with 30 yr fixed rates, the math just isn't working out for me to make any cash flow and the debt service monthly expense is wiping out any NOI and thus my yield. So... I am considering pivoting to interest only loans with a refi plan. Problem is... I used to use Bankrate to see a wide variety of rate options for quick underwriting and that website doesn't allow me to get rates for the I/O ARMs for multi family rentals. I really want to understand how those rates are comparing today against 30yr fixed. What are they and where can I easily find them so I don't need to fill out any forms? Credit exceeds 830. Are any lenders giving out I/O ARMS with no points and are the rates lower than 30yr fixed? Any other creative financing or options?
Rates for interest only on a 10 yr ARM are not going to be lower then a 30 year fixed. (for that matter they will not be lower then a 10 arm with amortizing payments) as interest only actually adds a layer of risk to the lender. But, your payment can still be lower on an IO even with a slightly higher rate due to the simple interest calculation. and sure, you can get them without any points/buy down but the rate will of course be higher then if you did pay points.
and details matter, so as for quotes the reality is to get a real quote, you are likely going to have to give someone the actual details or you are just getting a thumb in the air quote.
Hurst Real Estate, INC4.991 Reviews
35 Replies
- Member since 2023 · 50 posts · 16 votes2y
Quote from @Carlos Ptriawan:
Also @Selina Giarla , this is just for your consideration , I know one CU that has 10YARM "Movable" product that their ARM is always have spread of negative 50-75 bps compare to 30YFRM.
Currently they have:
10/10 40 Years APR 6.440% Payment per $1,000 $5.77
30YFRM 6.875% APR: 6.892% Payment per $1,000 $6.57Where and which CU? Those are good terms.
- Member since 2019 · 7k+ posts · 4k+ votes2y
Quote from @Selina Giarla:
Quote from @Carlos Ptriawan:
Also @Selina Giarla , this is just for your consideration , I know one CU that has 10YARM "Movable" product that their ARM is always have spread of negative 50-75 bps compare to 30YFRM.
Currently they have:
10/10 40 Years APR 6.440% Payment per $1,000 $5.77
30YFRM 6.875% APR: 6.892% Payment per $1,000 $6.57Where and which CU? Those are good terms.
exactly lol, this for CA state loan, OO loan only. So your homework is to call/contact 10 credit union nearby. I am still doing this often. Nobody can beat $5777/month for one million loan lol.
i knew the best lender in my area and each of their offering. I emailed them one by one.
- 2yV.G JasonPro MemberInvestor · Member since 2022 · 3k+ posts · 3k+ votes
Completely agree with that assesment @Carlos Ptriawan but as you already know from my views; I am betting on long-term investing, and appreciation. So IO for my plans don't materialize, but yes in your examples it does make sense. It's a niche product, and I'd say in most people plans it does not make sense.
And 100% agreed on local credit union. I believe all my loans are originated by local credit unions in cities I operate in outside of the Raleigh-Durham area. Can't find one that does it the way I want to in that locality.
- Member since 2019 · 7k+ posts · 4k+ votes2y
Quote from @V.G Jason:
Completely agree with that assesment @Carlos Ptriawan but as you already know from my views; I am betting on long-term investing, and appreciation. So IO for my plans don't materialize, but yes in your examples it does make sense. It's a niche product, and I'd say in most people plans it does not make sense.
And 100% agreed on local credit union. I believe all my loans are originated by local credit unions in cities I operate in outside of the Raleigh-Durham area. Can't find one that does it the way I want to in that locality.
correct, so IO product can be good for long term if we add principal and also only if the number could COMPETE with 10YARM.
Eg if 10YIO is $5.77 per $1000 an 10YARM is $5.90 I would go for 10YARM. But if the spread is $3.00 per $1K (which will be impossible), then I go with IO.10YARM for sure, mathmatically speaking , would perform better than 30YFRM.
So.... for buy and hold, 30YFRM/10YARM is always good choice. So this is good for CA SF investing.But for cheaper area in Indiana somewhere or somewhere with less appreciation then IO product could be useful.
When people understand how these loan works (and visualizing it) following the appreciation chart (for example using ZHI) this is the real easiest wealth generator.
I can just keep buying house and renovating non stop. - Member since 2019 · 7k+ posts · 4k+ votes2y
Also Jason, the pivot when IO product is useful or not is the Fed rate.
With Fed/mortgage rate above 6%, then IO could be very useful depending on circumstances. But when money is cheap like 2010-2022 era then there's no point even looking at IO. Key to understanding this is visualizing the ratio of principal payment:interest within the first three years.This is why, few CU and lenders are started offering 40Y with and without IO. IO only is eventually good for professional flipper, especially to reduce the risk of possible downturn and increased the cash-flow.
- Member since 2019 · 7k+ posts · 4k+ votes2y
Also to OP, I am trying to help you answering this question using AI, here's 5 scenarios with assumption of loan of 500k with rate of 7%:
-------------------------
40Y 10YARM:
Key Details
Loan Amount: $500,000
Loan Term: 40 years
Mortgage Type: 10-year Adjustable-Rate Mortgage (10YARM)
Initial Interest Rate: 7% (for the first 10 years)
The $2,918 monthly payment is based on the initial 7% interest rate during the first 10 years of the loan.
------------------------------------
30Y 10YARM:
For a $500,000 loan with a 30-year 10/1 adjustable-rate mortgage (ARM) and an initial
interest rate of 7% for the first 10 years, the monthly mortgage payment would be approximately $3,326
-----------------------------------------------------
40Y IO:
For a $500,000 loan with a 40-year interest-only period,
the monthly mortgage payment would depend on the interest rate. Here are some examples based on
common interest rates:
At 5% interest rate:
Monthly payment for 40 years interest-only = $2,083
At 6% interest rate:
Monthly payment for 40 years interest-only = $2,500
At 7% interest rate:
Monthly payment for 40 years interest-only = $2,917
--------
so 40Y 10YARM vs 40Y IO: $1 LOL :)
----------------------------------
draw amortization chart for 30YFRM with 7% rate every year for $500,000 loan
Here is an amortization chart for a 30-year fixed-rate mortgage (30YFRM) with a 7% interest rate on a $500,000 loan:
Year Beginning Balance Monthly Payment Interest Paid Principal Paid Ending Balance
1 $500,000 $3,326.98 $35,000 $5,369.82 $494,630.18
2 $494,630.18 $3,326.98 $34,624.11 $5,745.73 $488,884.45
3 $488,884.45 $3,326.98 $34,221.91 $6,147.93 $482,736.52
--------------
draw amortization chart for 40Y Interest only with 7% rate for $500,000 loan
To calculate the amortization schedule for a 40-year interest-only mortgage with a 7% interest rate and a $500,000 loan amount, we can use the following steps:
During the interest-only period (first 10 years):
Monthly payment = $2,916.67 (7% annual interest rate / 12 months)
Total interest paid in the first 10 years = $291,667 (2,916.67 x 12 months x 10 years)
Loan balance remains at $500,000 during the interest-only period
After the interest-only period (remaining 30 years):
Monthly payment = $3,326.89 (calculated using the standard mortgage payment formula with a 30-year amortization period and 7% interest rate)
Total interest paid in the remaining 30 years = $496,869
Total interest paid over the full 40-year term = $788,536
Loan balance at the end of the 40-year term = $0 (fully amortized)
The full amortization schedule would look like this:
Year Interest-Only Payment Principal Reduction Loan Balance
1-10 $2,916.67 $0 $500,000------------
so if you use 30YFRM an sell within 3 years; you are making additional 18k profit guaranteed compare to 40Y IO. This is what I'm saying the IO product is good if you plan to sell very quick , exception is if you want to add principal in every month but it would forfeit your cash-flow.
Also I want to invite you to download amortization schdule excel sheet at
https://www.vertex42.com/Files/download2/gdrive.php?file=int... so you can make better informed decision. - Lender · Dallas, TX · Member since 2024 · 10 posts · 1 vote2y
Texas - Hold 'em... DSCR LTR
Things to consider:
1) Not looking at the right properties - I just Prequalified 3 TX properties for Buy and Hold LTRs on Friday.
2) I/O DSCR Loans: All interest-only payments turn into fully amortized payments (but on shorter terms). Most lenders will still want to qualify the property on the remaining full amortization term to de-risk the loan.
3) Buyer PreApproval & Property Prequalification: You need to work with a lender that can provide this support. Mentor, help de-risk, and diverse programs.
4) Direct Lenders (NOT BANKS): A Direct Lender is the one who Originates, Processes, Underwriters, Closes, and Funds the loan. They also can consider making loan exceptions with compensating factors.
5) DSCR Negative Cash Flow Loans: Yes, they exist!
Don't Give Up!
- Lender · Chicago · Member since 2023 · 176 posts · 70 votes2y
Are you planning on going DSCR or Conventional?
- 12 Penns Trail Suite 138 Newtown, PA 18940 · Member since 2023 · 1k+ posts · 319 votes2y
What is the loan scenario looking like ?
- 2yStacy RaskinBusiness MemberLender · Member since 2022 · 1k+ posts · 505 votes
Quote from @Carlos Ptriawan:
Quote from @V.G Jason:
Quote from @Selina Giarla:
Thank you! Are DSCR usually fixed rates? Do they require annual DSCR tests? Do I need to refi to pull cash out? I see you referenced that so curious how that works. Does LLC as borrower have a higher rate than if it were personal? What if the LLC would be brand new with no financial history? Assuming DSCR is greater than 1, are the rates usually better than 30 yr fixed. Is there an I/O option?Quote from @Stacy Raskin:
Quote from @Selina Giarla:
It would be for a rental. I was aiming for texas but open to other landlord friendly states so long as the numbers work. I just need an idea of where to start. I have no idea... is the 10/1 int only ARM at 9%, 7%? Pts, no pts? Not sure.Quote from @Stacy Raskin:
@Selina Giarla, what kind of loan are you trying to do and is it for an investment property? If so, what state and what are the details? There may be some additional loan programs depending on the situation.
An option is to get a DSCR loan. 1-4 unit programs generally have better rates compared to 5+. These have 30 year fixed options.
More info here:
DSCR loans won't use your income to underwrite the loan.
DSCR loans are based off of down payment, credit score and either actual or market rents so it helps to supercharge an investor's real estate goals and net worth.
Here's a bit more in detail about how rates are calculated for DSCR loans:
1. Credit score- the higher the best. 760+ generally gets best pricing for investment property loans with most lenders
2. Loan to value ratio: The higher the loan to value ratio (LTV) is, pricing takes a hit. So your pricing will be higher for a 80% LTV loan than for a 60% LTV loan.
3. Prepayment penalties- usually 1-5 year terms. The shorter the prepayment term has an impact on increasing the rate.
4. Are you cash flowing the property? More on how that is calculated below. Is your DSCR ratio greater than 1-meaning are you cash flowing (according to the lender's criteria of mortgage, property taxes and insurance (and HOA) if applicable). Many lenders will not do a DSCR loan unless cash flowing. If they will do a loan with less than 1, the pricing takes a hit. This criteria is for 1-4 and 5-8 unit programs.
I've included an example below to help illustrate this.
So different lenders have different rates (which do vary even for DSCR loans) but these are factors they all consider.
See example below:
DSCR < 1
Principal + Interest = $1,700
Taxes = $350, Insurance = $100, Association Dues = $50
Total PITIA = $2200
Rent = $2000
DSCR = Rent/PITIA = 2000/2200 = 0.91
Since the DSCR is 0.91, we know the expenses are greater than the income of the property.
DSCR >1
Principal + Interest = $1,500
Taxes = $250, Insurance = $100, Association Dues = $25
Total PITIA = $1875 Rent = $2300
DSCR = Rent/PITIA = 2300/1875 = 1.23
DSCR lenders generally let you vest either individually or as an LLC. It's a great way to increase your net worth and these loans can also be used to pull cash out of a property as it appreciates allowing you to reinvest money into new deals.Happy to connect to discuss further.
I don't know why a DSCR loan would make sense, if you're unable to make it cash flow originally with the DP. That's the underlying problem and the advice is to use a loan product that literally is the opposite of that? Makes little sense. It needs to be intrinsic for a DSCR loan to qualify, or they penalize you with an excess add on fee and/or rate. .
Secondly, an IO really only make sense if you're investing in a short-term duration. If you capturing true equity gain, you gotta wait for a longer period than say 3-5 years. So yes, you can IO then sell. But IO then re-fi, you just paid interest and captured very little equity. What's the point? You might even run the risk of being underwater.
If you want to cash flow more "on paper", invest in the hood. Or if you want to do it, learn to buy distressed, fix up and pull money out but not as much as people think like 80% probably closer to 75%. Or don't bother with that and put 30-35% down on MLS deals that are still primed for upside(i.e good locations that well below citys median price point). And before someone says that's speculation, no **** sherlock so is all forms of investing.
The visualization of the BP forum is always like this :
Newbie investor almost has no clue about what they are asking. Then the friendly retail investor is giving advice from the interest of investor. But then our DSCR lender friend is giving advice that redirect the answer into their own loan product (which ofcourse carry higher interest rate). Then someone from retail investor like what you said, that that's not particularly correct. Hence our newbie investor is getting confused again.It's just, retail investor like us, sometimes getting bored too giving the answer/help.
It's the visualition of mortgage, loan, P&I, loan product , amortization that's very important here to be understood by the investor.
Proving useful information.
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