Rental Property Investor · Los Angeles, CA · Member since 2019 · 13 posts · 3 votes
I am currently looking at different options to get pre-approved for my first rental property home loan in the US and was wondering if it is a good idea to use a 10 Year Balloon ARM Loan @ 4.37% for my purchase. What are the pros and cons? I have good credit score +730, income and can make 10% to 15% downpayment.
@Kaveh Jafari to be clear, if you can get a fixed rate 30 at prevailing or even slightly higher rates thats always a safer option and it should be available under 5% right now. Credit unions aren't usually the sources of the most competitive loan rates. And if you want to hold for a long time why not do that?
Figure out if you can pay it off in 10 years. If not, look at your amortization table for your balance in 10 years. See what the payment would be at 6.5% & 8.5%. Can you afford those payments and make money? How often can the rate increase?
The only arm loans you would catch me in are ones I plan to pay off before they adjust. Are you being denied any fixed rate loans?
@Kaveh Jafari 10 years isn’t too bad, and if you figure the pay down in 10 won’t be enough to make you feel comfortable I would question the purchase in the first place.
A few things to think about:
I would add the cost of refinancing to your numbers
If it’s fixed for 10 years as opposed to a reset at 5 that’s pretty good.
Using leverage profitability peaks around 10 yrs or so it’s a likely sale point anyway
Is there a prepayment penalty either throughout or one that steps down?
@Bill B. thanks for your response. No I was not denied for a fixed rate loan but just shopping around for an investment loan pre-approval at this stage and came across this 10-year balloon offer from my credit union.
Why would you say I should work out the payments @ 6.5% or 8.5% for the remaining balance after 10 years? Is that refinance through a private lender? Or we are just being a bit conservative and assuming that the home loan rates for a refi will be around 6-8% 10 years from now?
That is a great question as far as rate increase goes. I am a bit confused myself. Because even though the title of the loan says ARM but when you read the product highlights it states the rate will be locked in for ten years! Here is the description below:
10 Year Balloon ARM Investment:
"With our 10 Year Balloon ARM Investment product, your initial rate will be tied to the One Year Constant Maturity Treasury (CMT) Index, and will not change during your ten year repayment period. At the end of your ten year fixed rate period, this product features a balloon payment where the entire principal balance of the loan and unpaid interest is due. The loan is amortized over 360 months and due in 120 months. The lender is under no obligation to refinance the loan at that time. You will, therefore, be required to make payment out of other assets that you may own."
However the product disclosure states the following:
"At a 4.375% initial interest rate, the APR for this loan type is 4.683%, subject to increase. Based on current market conditions, the monthly payment schedule would be:
119 payments of $998.57 at an interest rate of 4.375%
1 payment of $160,534.62 at an interest rate of 4.375%
This payment schedule is based on a $200,000 loan on a $250,000 property.
If an escrow account is required or requested, the actual monthly payment will also include amounts for real estate taxes and homeowner's insurance premiums."
Yes. I’m thinking interest rates will be at least 2% higher 10 years from now.
You are right it’s weird that it says arm but it’s not adjustable, misleading but in this case in a good way.
If you don’t plan to pay it off in 10 years you’re going to owe almost exactly 80% of the original balance in 10 years.
If you don’t plan to pay it off or sell within 10 years, I’d say look at the 15 or 30 year fixed rate loan. Unless they are more than 5.5-6%.
Don’t forget as well 30years down to 15 is only 50% higher payment. And 30 down to q0 is only double. With today’s near historically low rates it just doesn’t seem like a good time to only lock in 10 years and force a refi in to your future.
@Jonathan R McLaughlin HI Jonathan, thanks for your good advices. It seems like the rate is fixed for ten years even though the title of the loan says ARM. Good point on profitability peak. I do not think there is any penalty for prepayments but will definitely double check.
I personally wouldn’t like that . Your assuming you’ll be able to refinance it at that time and at a fair rate . Not only will the rates be higher because of hyperinflation but In an economic crisis lenders will very stingy and selective on who gets what . Small guys will be overlooked . Can’t you find a better arrangement than this .
@Kaveh Jafari to be clear, if you can get a fixed rate 30 at prevailing or even slightly higher rates thats always a safer option and it should be available under 5% right now. Credit unions aren't usually the sources of the most competitive loan rates. And if you want to hold for a long time why not do that?
@Dennis M. Thanks for your advice. I am only shopping around and came across this offer through a credit union and it was interesting. I agree with the risk of refi in 10 years from now. I will keep looking and comparing them so hopefully can find the best deal out there for me. Thanks again
@Jonathan R McLaughlin really good advice, you are right. You never know what is going to happen 10 years down the line. I will keep shopping to see what I can lock in for 30-year fixed loans. Thanks again
I was looking into some info on this 10-Year Balloon-Investment Property Mortgage and came to your post. Wondering if you ever got this loan? If so, would like to know your thoughts.