10/1 ARM better than 30 yr FHA? 550k & 315k property

5 Replies

Guys, I have a 30 year - 3.75% fixed rate loan on 550k property that I am thinking of refinancing it into a 10 year ARM. Currently the loan has completed 2 years. Property is now an investment property for which the original loan was secured as a primary residence loan. I also bought a 2nd home - vacation (315k) - closing in a few months - and have locked a 30 year loan at 3.875 interest rate - by paying $1300 fee. My question is : 1. Does it make sense to convert both of these loans to 10 year arm loans to get interest rates dropped to 2.5? 2. Since the second home hasn’t closed yet - my options are open and no closing costs etc has been paid yet. Is it recommended to take 10 year arm on it? 3. What fees/penalties do I have to pay to refinance house 1? I read that arm loan conditions are that home can’t be sold for 5-8 years ? Both these above homes are investment purposes and eventually I will be buying a 3rd home in 1.5-2M range for living myself in a couple of years. Currently I loose around 4K/year on home #1 (550k) - if my interest rate drops from 3.75 to 2.5 - there’s a considerable saving of $300 something per month in p&i Please advice the pros and cons

Varun, unless there's a PPP (Pre-payment Penatly) on your current mortgage, you can refinance without paying any penalties and you can have the closing costs worked into your total loan amount. I would make sure your rate lock covers the period of time in which it will take to close the new property. In regards to deciding between the 10 year arm, it'd be wiser to do that if you don't plan on keeping the home longer than 10 years. 2.5% sounds pretty low for an investment property. What does your current Mortgage Loan Officer advise you on doing?

@Varun Parkash This is going to be an overly general statement but you have really low cost debt with a locked-in rate for nearly 30 years.  Put yourself out 5+ years into the future.  Do you think you'll be happy with your interest rate?  I'm going to guess the answer is "yes" and the same will be true if you were asked the same question 20 years into the future.  The single thing that keeps me (metaphorically) up at night is that my commercial debt is on a 5 year with a balloon.  I'm not worried about paying the mortgage, the balance, or even the amortization period.  But, you never know what's going to happen of what the interest rates will look like in 5 years.  Will they still be 4.5%?  Probably not.  Will they be 6%?  7%?  Who knows.  They could end up at 8% for all I know.  While the "wheels don't come off" at 8%, it certainly won't be any fun to have a lower loan balance but a monthly payment that's about the same...maybe a little lower...or maybe a little higher.  Anyway, good ol' fashioned boring 30-year fixed rate mortgages are a lovely thing... 

@Varun Parkash Unless I'm misunderstanding, you will not be saving $300 in P&I -- If you are refinancing 10 year arm @ 2.5%, your payment will increase substantially. Assuming you are financing 80%, your P&I will increase by ~$2100 with a 10 year loan. Yes, you will incur lower interest fees in the long-run but the cash-flow impact is substantial.

If you are thinking about investing in other properties, you should really think strategically about how a (higher) 10 year mortgage payment will impact your DTI (debt-to-income) ratio. Freddie/Fannie have very strict underwriting guidelines and once your debt-services obligations exceed their stated % of income thresholds, securing new conventional financing may prove difficult.


Personally, I am with @Andrew Johnson -- I have all of my properties in 30 year fixed mortgages. Yes, the interest rate if a little bit higher than a 10 year, but the lower payment helps me maximize my cash-on-cash return while allowing me to re-deploy excess capital to new investment endeavors.

Originally posted by @Louis A. :

@Varun Parkash Unless I'm misunderstanding, you will not be saving $300 in P&I -- If you are refinancing 10 year arm @ 2.5%, your payment will increase substantially. Assuming you are financing 80%, your P&I will increase by ~$2100 with a 10 year loan. Yes, you will incur lower interest fees in the long-run but the cash-flow impact is substantial.

If you are thinking about investing in other properties, you should really think strategically about how a (higher) 10 year mortgage payment will impact your DTI (debt-to-income) ratio. Freddie/Fannie have very strict underwriting guidelines and once your debt-services obligations exceed their stated % of income thresholds, securing new conventional financing may prove difficult.


Personally, I am with @Andrew Johnson -- I have all of my properties in 30 year fixed mortgages. Yes, the interest rate if a little bit higher than a 10 year, but the lower payment helps me maximize my cash-on-cash return while allowing me to re-deploy excess capital to new investment endeavors.

 Thank You Louis for your insights. Initially, i thought that 10 year loan = 120 months = so my per month P&I payments will go substantially higher as you pointed out.

For example: current Monthly P&I on 550K with 20% down at 3.75 (30 yr fixed) = $2038/month

Monthly P&I on 550k with 20% down at 3.25 (10/1 ARM) = $2038 + $2100 = $4138/month = which is a Substantially bigger amount.

My friend confused me by saying that on 10/1 ARM = you can pay your monthly payment divided into 360 months, which i felt is wrong. 

Updated 11 months ago

I was wrong. 10/1 ARM loan means: YOU are still on 30 year payment schedule with NO substantial impact to monthly payment as INCORRECTLY stated in my post. Example: i will continue to pay $2038 OR lesser in P&I if i do 10/1 ARM and NOT 2038+2100 = WRONG !

Originally posted by @Tyler Delbert :

Hi Tyler, I have asked my loan officer to advice regarding the same. I still need to find about pre-payment penalty.

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