Only qualified for 5/1 ARM Loan?

Question

I'm buying two multifamily duplexes that are situated on one parcel. Since they are on one parcel they do not qualify for any Fannie or Freddie conventional fixed loans (or so I've been told). Two banks are telling me that I will have to take out a portfolio loan and the options are 3/1 vs 5/1 ARM loans. Not being super familiar with either, and taking out over $450K in the loan, I'm anxious to learn my options as this is my first buy and hold investment.

Since this is an unconventional property, I'd love to hear stories about people with similar experiences.

Albert Bui · Answer

It sounds like you want to feel comfortable with the exact terms of the 3/1 or 5/1 ARM options right?

It should be pretty straight forward:

-the initial rate is locked and fixed for the intro period of 3-5 years depending on which you pick

-at the end of the 3rd or 5th year your rate adjusts annually (one time per year) based on a margin + an index. Most common is 2.5% margin + 1 Year Libor which probably comes out to about 3.25 - 3.375% currently (will vary based on the future rate of Libor or index)

- loan will adjust annually 1 time for the remainder of years 4 through 30 or 6 through 30 depending on which option you pick

- make sure to look a prepayment penalty or terms to make sure it works with your exit strategy so you dont end up trying to refinance out only to pay multiple points on the exit