3 Year ARM w/15% Down vs Conventional 30-Yr Fixed w/20-25% Down

Member since 2022 · 17 posts · 14 votes

Hey everyone, I'm exploring the idea of a 3-year ARM mortgage with 15% down vs a conventional fixed year mortgage for a longer-term buy and hold investment property. The rationale for considering the ARM is that, given the rates environment, I think there is a good chance that I would be refinancing in the next few years regardless. Therefore, the money saved from the lower down payment could be used to save for another down payment, renovations to improve rent and property values, etc. Beyond the higher initial monthly payments and possibility of rates staying/going higher, what other factors should I be considering?

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Caleb Brown

Real Estate Agent · Kansas City · Member since 2018 · 4k+ posts · 3k+ votes

Personally I'd rather have a fixed rate and refi down the road if they drop. The peace of having the same payment is nice. ARM is more common now but it's risky, you can't predict the future

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Caleb Brown
Real Estate Agent · Kansas City · Member since 2018 · 4k+ posts · 3k+ votes
3y
Personally I'd rather have a fixed rate and refi down the road if they drop. The peace of having the same payment is nice. ARM is more common now but it's risky, you can't predict the future
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John CardinalePro Member
Member since 2021 · 76 posts · 44 votes
3y
Is the property in need of a lot of work and is there a large gap between its current condition and the ARV you would need to call it successful? If so, you may be forced to get extra funds to fix it.
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Erik EstradaBusiness Member
Lender · Member since 2022 · 6k+ posts · 1k+ votes
3y
Quote from @Andrew Northcutt:

Hey everyone, I'm exploring the idea of a 3-year ARM mortgage with 15% down vs a conventional fixed year mortgage for a longer-term buy and hold investment property. The rationale for considering the ARM is that, given the rates environment, I think there is a good chance that I would be refinancing in the next few years regardless. Therefore, the money saved from the lower down payment could be used to save for another down payment, renovations to improve rent and property values, etc. Beyond the higher initial monthly payments and possibility of rates staying/going higher, what other factors should I be considering?

I would look into a 5/1 or 7/1 ARM given this climate. 3 years may not be enough time to see a significant rate drop to refinance.
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Stacy RaskinBusiness Member
Lender · Member since 2022 · 1k+ posts · 497 votes
3y
@Andrew Northcutt, for experienced investors, there are 30 year fixed rate 15% down single family investment property programs for DSCR ratio 1.2 or above with a middle mortgage credit score of 720 minimum. An easy math example of $1,000 expenses to $1,200 monthly rent.

DSCR loans are based off of down payment, credit score and either actual or market rents so it helps to supercharge an investor's real estate goals and net worth.

Here's a bit more in detail about how rates are calculated for DSCR loans:

1. Credit score- the higher the best. 760+ generally gets best pricing for investment property loans with most lenders

2. Loan to value ratio: The higher the loan to value ratio (LTV) is, pricing takes a hit. So your pricing will be higher for a 80% LTV loan than for a 60% LTV loan.

3. Prepayment penalties- usually 1-5 year terms. The shorter the prepayment term has an impact on increasing the rate.

4. Are you cash flowing the property? Is your DSCR ratio greater than 1-meaning are you cash flowing. Many lenders will not do a DSCR loan unless cash flowing. If they will do a loan with less than 1, the pricing takes a hit.

I've included an example below to help illustrate this.

So different lenders have different rates (which do vary even for DSCR loans) but these are factors they all consider.

See example below:

DSCR < 1

Principal + Interest = $1,700

Taxes = $350, Insurance = $100, Association Dues = $50

Total PITIA = $2200

Rent = $2000

DSCR = Rent/PITIA = 2000/2200 = 0.91

Since the DSCR is 0.91, we know the expenses are greater than the income of the property.

DSCR >1

Principal + Interest = $1,500

Taxes = $250, Insurance = $100, Association Dues = $25

Total PITIA = $1875 Rent = $2300

DSCR = Rent/PITIA = 2300/1875 = 1.23

DSCR lenders generally let you vest either individually or as an LLC. It's a great way to increase your net worth and these loans can also be used to pull cash out of a property as it appreciates allowing you to reinvest money into new deals.
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Jonathan R McLaughlin
Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes
3y
Kind of hard to give good advice without the respective interest rates. We use loans with a 5 year reset all the time, and I would still say the second option of 30 year fixed is a much safer approach in terms of risk and flexibility if the spread isn’t too great. You may be refinancing into a higher rate environment, for one, and you (actually presumably your tenants) are paying down the loan and making you money at the 30 year rate which is pretty good right now. 7% or so ain’t nothing to sneeze at as part of your return.
and if we are bumping along the ceiling in terms of prices the extra margin might make a difference.
I would give a much different answer if we were in a rising prices, falling interest rate environment.
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Jonathan R McLaughlin
Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes
3y
Kind of hard to give good advice without the respective interest rates. We use loans with a 5 year reset all the time, and I would still say the second option of 30 year fixed is a much safer approach in terms of risk and flexibility if the spread isn’t too great. You may be refinancing into a higher rate environment, for one, and you (actually presumably your tenants) are paying down the loan and making you money at the 30 year rate which is pretty good right now. 7% or so ain’t nothing to sneeze at as part of your return.
and if we are bumping along the ceiling in terms of prices the extra margin might make a difference.
I would give a much different answer if we were in a rising prices, falling interest rate environment.
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