Why I Just Switched 4 of My Mortgages From Adjustable to Fixed-Rate

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Last Friday was a very interesting day for me, as I received a loan commitment on one of my larger investment properties. To some of you, this might not be a big deal, but for me it was huge. I was under the impression that I’d never get a bank loan again, especially with 30 properties in my own name. Sounds pretty bizarre compared to the recent lending environment, doesn’t it?

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Change in Strategy

After 2005, things started to get weird, and you could feel the crash coming. By 2007, it was looking like one’s strategy needed to change. Up until that point, I was acquiring a lot of rental units, and I was taking advantage of all the easy mortgage terms available in the marketplace. In fact, I refinanced everything that I intended to keep long-term.

Since prices had jumped up so high, like I hadn’t seen in the previous 20 years, I even sold 10 of my buy-and-hold type of properties. Normally, I never would’ve done that, but some of these neighborhoods were getting really crazy numbers, and I think I was right to just get out while the getting was good. Some of these areas literally dropped more than 50% after the real estate crash.

By 2007, I had sold some of my tougher, older properties, where I had taken a lot of depreciation, and I started moving more into commercial real estate and notes. As for my remaining units, consisting of single-family residential and apartments, my properties were pretty much split down the middle between fixed-rate mortgages (6.5 to 8%) and adjustable-rate mortgages (3 to 4.5%), and they included some interest-only loans. (Please note: These adjustable rate loans were all on properties that still cash flowed even at the highest cap rates.)

Related: How I Bought, Rehabbed, Rented and Refinanced 14 Properties at Once

All of my excess cash flow was now being poured into safer buckets, including IRA accounts, insurance contracts, and notes that included private, hard money deals that I was doing for other real estate investors. But I had stopped buying buy-and-hold rentals due to the fact that the banks were not allowing cash out refinances anymore. In fact, with a self-employed guy like me, they literally stopped refinancing rentals to the point that the only option left for many investors was to fix and flip properties. It was at this time, I stopped buying residential rentals and switched to notes, because you don’t have to qualify to buy a note; you just need the cash.

Hamp Program

Right before the crash, I wasn’t really sure what interest rates would do, but I felt I was ready regardless. Here we are coming up on 10 years later, and I almost wish all my rentals had adjustable-rate mortgages, because I saved and made a lot of money over the last decade.

So here’s the irony. About two weeks ago, my lender called me up and asked me if I’d like to refinance four of my 10-year, interest-only loans that are about to reset in the next six months. I said I didn’t believe I was eligible, and you know what the loan officer said? “This loan has no income or asset verification requirements, and there’s no appraisal fee, either (105% LTV).” As you can imagine, I’m someone with a whacked out debt-to-income ratio anyway, so I was dancing in the streets.

Three of the properties do have to get an appraisal, but all four of these first mortgages are well covered with equity at this stage. So all the adjustable-rate mortgages that were originally 3 to 4.5% are now going to be fixed at approximately 4.5%. I asked the loan officer if there were any other programs, and she said I could even refinance to a 15 year or even another adjustable-rate mortgage.

Related: Why Property Managers Should Remind Clients to Refinance NOW

You’re probably starting to think that I’m a little nuts, but if I was liquidating one of these properties in the next five years, the adjustable-rate mortgage would actually make sense, but I’m going with the 240-month fixed-rate mortgage since I’m getting closer to retirement age, and I plan to keep the properties long term.

With all the talk in the market about a pending increase in interest rates, one needs to keep their pulse on things to know when it’s time to change strategies in order to seize the next great opportunity. So, should you be calling your mortgage broker about refinancing to a fixed-rate mortgage?

Investors: Have you heard about this option? Is it something you would consider?

Let’s talk in the comments section below!

About Author

Dave Van Horn

Dave Van Horn is President at PPR The Note Co. - an operating entity that manages several funds that buy/sell/hold residential mortgages, both performing and delinquent. Dave has been in the Real Estate business for 25 years, starting out as a Realtor and contractor and moving onto everything from fix and flips to Raising Private Money.

15 Comments

  1. James Gorman IV

    Thanks for the info. in these posts.

    Does HAMP (the Home Affordable Modification Program) allow banks under this program to
    make multifamily property loans?

    And if so, any suggestions related to a few West Coast, or better yet banks operating in Washington State that might be good to do business with?

    • Dave Van Horn

      Hi James,

      I believe banks can implement HAMP on multifamily property loans, because I’m doing it on a two unit property right now.

      As for the specific West Coast question, I can’t say because my experience is dealing with large banks that work in many states but I think HAMP is available to any participating mortgage servicer in the US.

      Best,
      Dave

    • Dave Van Horn

      Hi Tai,

      There could be various reasons why someone isn’t eligible (income, credit, the current rules, etc) but I wouldn’t give up because I wasn’t eligible at first either. I would be persistent with asking and be patient for an answer.

      Best,
      Dave

  2. Shaun Reilly

    While I think this is great for smart investors that don’t fit in the Fannie/Freddie check boxes, if they are bringing back easy “liar loans” the pending market correction might be coming up faster than people think.

    Fine by me, would welcome the glory days of 09-12 back again! 🙂

    • Dave Van Horn

      HI Shaun,
      Thank you for your comment.
      The loans that I had refinanced were Frannie/Freddie loans, which I had been current on for 10 years (since origination). It is essentially a retention program to keep ARMs from adjusting, and since I had never missed or made a late payment, there was little risk for the lender to refinance in order to keep my payment the same or lower it.
      Best,
      Dave

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