Adjustable or fixed-rate?

[Rich Weese]

I'm in the process of attempting to increase the amount of cash reserves I have for anticipated purchases in the near future. As many of you know, I am a buy and hold investor and do have properties that are free and clear.

At the present time it appears very able rates are under 3% while fixed rates are in the high threes. I'm curious as to what you would do and why?

I don't deal with financing very often and am actually not very experienced in that arena and this is the reason for my question. I do tend to consider the following two items in attempting to make a decision so if you would like, take this into account also.

1-the difference in the amount of payment will not matter in my monthly living expenses.

2. All of my properties go into a bypass trust for grandkids so the end result when the properties are paid off free and clear will have no relevance to me.

Appreciate any thoughts or input into this discussion.

Thanks. Rich

[Bill Gulley]

What goes down also goes up! When you look at an ARM don't be attracted so much by that entry rate (sucker rate) look to the adjustment allowed per year, annual cap and the ceiling rate, the rate possible. You can also look at the floor rate, what the rate would go down to if the index rates fall.

What the ARM is indexed to also makes a difference, if it says Pime Rate, on the date of the making of the note, that can be pretty volitile, if it is an index like LIBOR, the London Inter-Bank Offer Rate that is pretty stable as is the Fed Fund Districts rates.

The time you expect to hold the property plays a role, if you are going to sell before the ARM rate can adjust past the current fixed rate to average the fixed rate, the ARM is a choice for the up front cash flow, but really that won't be alot. If you expect to hold the property look to the fixed rate. Now that also goes with your expectations of the economy, if you think in 5 years for example rates will drop, you could gamble, but conservative thinking says take the fixed rate.

Rich, in your situation with all the property you have I doubt you're talking about a 30 year fixed with Fannie-mae. Banks offf fixed rate for say 7 years as potfolio loans. So your window is closed to 7 years for analysis, look at the cap rates and periods for adjustments (some commercials can adjust monthly or semi-annually or annually). You can work out the payments over that window term and compare, assuming the max adjustment upward for the ARM. A disclosure of this is required for residential, but not commercial, you can still ask.

Don't forget to compare loan costs and the points as pre-paid interest. Good luck..