Could 10yr "Fixed ARM" be better than 30yr fixed?

5 Replies

Hi everyone, 

I've been flipping for a couple years now and I'm working on making this recently rehabbed home into a rental. (BRRRR method of course) The bank is offering a 30 year fixed at the price I purchased the home ($125k) or they will offer more cash if I go with a 10 year fixed rate that becomes an ARM after ten years. That loan they will keep in house aka portfolio loan. The 10 year comes with a ONE percent lower interest rate (3.85% vs 4.85%) and lower closing costs.

Are there any pitfalls I need to be aware of?

@Michael Healy That product just sounds like an ARM - period. That is the typical function of an ARM - fixed for set period and then starts adjusting.

The portfolio aspect may allow you to go higher than the 30 Year Fixed based on set loan to values. Is the portfolio product to 80%? The 30 Year Fixed does sound high for an investment property, the 10/1 ARM sounds pretty damn low.

Thanks for the reply Jeff!

The 30 year fixed is based on the purchase price of $125,000.

The ARM ("portfolio product") is based on 75% LTV.

1st the bank or any lender should offer you a 75% LTV cash out on a Fannie Mae loan once you have been on title for 6 months or more? It should not be based on the purchase price unless you are financing it within the 1st 6 months?

That said, I would run the numbers on both loans and see what that savings would be at the 10 year mark? Yes, your considering 2 different loan amounts and interest rates, but any mortgage program can tell you what the balance would be on the loans at the 10 year mark. If you are realizing any more than a $5000 savings, at that point I would take the 10/1 ARM. I say $5000 because that would be the closing cost to refinance the place at that time if you don't like the adjustable rate?

Now what are rates going to be doing in 10 years, no one knows and could accurately predict. But you will have 10 years of loan pay down and 10 years of potential appreciation? So in some ways, it might be worth the risk. Besides, will you need some cash at that point, if so, refinancing might be the best option anyway? 

Just crunch all the numbers, get a game plan and go forward. But don't be limited by the lender only willing to do the fixed rate loan based off the purchase price. Wait out the 6 months title seasoning and get a 75% LTV Fannie Mae Non-owner occupied refinance?

I guess I didn't mention it but I have only owned the home for 4 months. I need the money back to do the next flip. So waiting 2 months doesn't seem worth it. I do this full time.

Huge thanks for the replies!!! 

@Michael Healy I think there are some very important items here to be aware of. On ANY Adjustable Rate Mortgage (ARM) is in the bank's interest to sell that loan. It hedges the bank's exposure. Since rates will likely be higher in the future, it's likely that your loan will have a higher rate. So the bank loves to sell ARMs. The ARM type you were offered is called a 10/1 ARM. However, a 10/1 ARM would certainly affect your "affordability" of your next property. On an ARM, banks are required to calculate your debt based on the WORST POSSIBLE RATE when calculating your "DTI" if the ceiling on that ARM is 8% (which it likely is) that means you will not be able to afford as many properties in the future. Now if you are ok with all of this, then that is fine. But I hope that this answers your "any pitfalls" question. If you have more questions feel free to ask. Thanks!

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