30 year or 5/1 ARM for my situation?

Question

I own 1 rental and I'm looking to purchase another home. Now, I could buy a $50,000 home with 100% cash, but I want to get a mortgage so I can keep money as reserve, plus let the tenant pay the mortgage.

Looking into the different types of mortgages, should I go with a something traditional (like a 30 yr) or something else? I've been looking into a 5/1 ARM specifically because I can/will pay it off in 5 years and I want to take advantage of the lower fixed-rate.Any information and advice is appreciated.Also, is it possible to get a cashout refinance on my rental property with a 5/1 ARM?

Looking into the different types of mortgages, should I go with a something traditional (like a 30 yr) or something else? I've been looking into a 5/1 ARM specifically because I can/will pay it off in 5 years and I want to take advantage of the lower fixed-rate.

Any information and advice is appreciated.Also, is it possible to get a cashout refinance on my rental property with a 5/1 ARM?

Any information and advice is appreciated.

Also, is it possible to get a cashout refinance on my rental property with a 5/1 ARM?

Harjeet Bhatti · Answer

@Erman A. I do my calculations on the rate of return what I spend on my  investment. According to information you provided if I would be in your situation will go with 1st option because of risk factor.  I don't know how  much time you have spend on market condition in your area but trapping this much money on one investment without knowing the market conditions is too risky.  If you have money sitting in your account you don't need  3rd option is the way to go but not for me unless I have all the facts in my hand.

Erman A. · Answer

Thank you guys , I really appreciate for the respond. I also think the same as

@Anthony Dooley  , because it will be 5 years fixed anyway and because he is foreign , the rate is already high so the rent amount breaks even and gives only few hundred dollars. I feel like , if you have the all cash funds , why would I pay extra $23,000 closing +$89,000 interest in 5 years ARM which makes $112,000 you kind of help the bank in this situation.

I truly appreciate @Harjeet Bhatti respond but I don't see a risk in cash deals. What kind of risk I can have if I pay cash? Even If I can't find tenant for my asking rent amount, I will only need to pay Tax + $200 most to maintain. At the end I will be making the most out of the deal.  ( This is a total investment property,  he already have the funds in his account sitting , he just want to invest and make profit while he is doing his business overseas )

Again, I truly appreciated your responses.Please let me know with any questions,

Thank you so much

Erman

Anthony Dooley · Answer

@Jeff Lee if you plan to pay it off in 5 years anyway, you will not really benefit from a mortgage. Why not pay cash and use the increased cash flow from the rent to pay yourself back over the next 5 years? Depending on the rent amount. In 5 years, do it again because you will have your money back. The reduced cash flow of the mortgage plus interest that you would pay isn't an advantage. The more you owe, the less your cash flow.

Harjeet Bhatti · Answer

@Erman A. According to information you provided I will pick  1st option. 1st and 2nd option hasn't huge difference percentage wise . No doubt 3rd option has more return but risky also.

Erman A. · Answer

Hi@Harjeet Bhatti and @Milton Rivera , I just have a quick question,I will truly appreciate your quick respond on this.! I currently have a foreign buyer looking to get a mortgage for $500,000 Single Family. He has the cash funds but He wanted to use a mortgage.

$500,000 Value requires $150,000 + $22,000 Closing Cost so total of $172,000 Down + %5.4 APR 5 ARM + 24 months payments needs to be in the bank account which is approx $73,000

At the end of the 5 years, the mortgage will be something around $322,000 so with the appreciation etc if we sell the house around $600,000 which - $172,000 - 322,000 = $106,000 NET max return.

But if we go all cash , he can make Approx $225,000 ( total rental income + average appreciation)

Or If we do All Renovation + All Cash  deal =$550,000 investment in 5-year approx profit will be around $300,000

If you'd have the All Cash Funds and if you would locate overseas so you don't have time but you also want to make profit , what would you do in this situation?

Thank you so much :)

Regards

Erman

Milton Rivera · Answer

@Jeff Lee

The type of finance you should consider will depend on your overall goals and strategy for the property.  It also sounds like you considering what to do with certain capital, leverage it or not and if so to what degree.  Are you focusing on cash flow or something else?  Depending on your number of outstanding mortgages, it will be hard to beat a traditional 15 or 30-year mortgage.  It may be prudent to maximize those loans first (I believe you can secure up to ten (10) with Freddie).  You can always pay them off early.

The 5/1 ARM may be a good play if you have a short-term horizon on the property, say you will be selling it in three or four years.  If you intend to keep it and you are not able to pay after the five year period you may be paying a higher interest rate and these are trending upward for the next few years.

Harjeet Bhatti · Answer

@Jeff Lee If you are planning to  pay in 5 years basically that's what you want so getting 30 year fix won't benefit you because it has higher interest rate.  Your tenant can pay your mortgage when you will divide in longer term amortization not as arm.