30 Year Fixed @ 4.625% or 7/1 @ 3.75%?

Question

Good Morning...

I'm closing on my first investment property and opted for the 3.75%, 7/1 ARM, over the almost 1 full point higher 30 year fixed.  What do you typically do, when using conventional financing on a deal, and why?  I figured the additional $130.00 per month can go toward principal pay down, but would welcome other perspectives. I've never had a fixed rate on the home I live in, as I've never live in a house for more than 5 years.  I could never wrap my head around paying for insurance (Which is what I view a fixed rate as) that I know it's unlikely I'll ever need.

John White · Answer

@Judd Campbell

I agree.  Those are rates from my local credit union.  The 7/1 product is an in house product that they would hold paper on.  The 30 year would be Fannie/Freddie, so would be sold on the secondary market.  I've already texted my LO and told him to change it to the fixed product, given that I just don't see myself selling this particular property.

Chad Lopes · Answer

there are a number of factors to think about, the primary one being the length of time you plan on holding. If short, go with 7-1. If longer go fixed all day long. The peace of mind of never having to worry about rates again is worth its weight in gold.

John White · Answer

@Jon Klaus

and @Jeremiah B.

Thanks for the feedback.  Jeremiah...You make a compelling point on today's cost of money.  This particular property is quite unique (Side by side duplex with 3 beds and 2 baths per side, hardwood floors, and completely updated...oh, and the last house on a cul de sac with almost no other multis in the entire town).  Because of the uniqueness of this property and the fact that I'm confident that it will never be vacant, I can see myself keeping it, beyond the 7 years.  Hmmmmmm.  I might be talking myself into changing my mind on this one.

Jeremiah B. · Answer

I'm a conservative long-term, buy and hold investor.   For me, in today's rates, I work exclusively with 30 year fixed mortgages.

I believe that mortgage rates will increase significantly over the next 5 years.  If I'm right, getting a 7/1 today means that I will have difficult choices to make in 7 years.  And over the long term, the 30 year option will have lower monthly payments, and will probably get you owning the property free and clear sooner.

If you plan to sell in a few years, a 7/1 is fine.  If you value the cashflow today over long-term ROI, a 7/1 is probably the best option.  And if you're a bit of a gambler, a 7/1 is also viable.

Happy hunting

Jon Klaus · Answer

I'd probably opt for the 7 year mortgage.  You have risk that rates could rise a lot in the period, and refinancing could be tough, however you'll be saving near $11k in interest.

You didn't say how long you think you'll own the home, that should be factored in. My bias is to trade up in quality, so I probably wouldn't own it more than 7-10 years.