am i getting taken to the cleaners by my bank?

I am trying to purchase an investment property in Montgomery county, Maryland, one of the best RE markets in the country (I live here, too). The property is a $300k 3br/3ba townhouse that will rent very, very easily. Here is the best deal I’ve come across so far that gives me a low down payment and minimum monthly payments:

90% “custom” 30-year mortgage at 3.3 margin points above the current 1 month LIBOR (currently 2.4, so my rate would be 5.7%). No points. No PMI. This is also one of those plans that gives me 3 payment options each month. 1) minimum payment (which is actually “negative amortization”), 2) straight interest-only, or 3) fully amortized. Fyi, if I pay 1 point ($3k) then it will go to 6 month LIBOR.

I am wondering if this plan is asking too much of me that I either suffer the risk of my payments changing month-to-month, or that I’m paying 3.3 point of margin. Does anyone think this is a bad plan, especially given that we all know interest rates are likely to go up this year? I would only be breaking even on the rent after I include taxes, insurance and HOA.

Thanks. And if you know of any better lenders or lending programs out there, please let me know!

dcguy wrote:

“I would only be breaking even on the rent after I include taxes, insurance and HOA.”

If you have a mortgage that may fluctuate from month to month, and you are just breaking even with the rent, what are you going to do when interest rates go up but your rent does not because you cannot get a renter at a higher rent? What are you going to do when one renter damages the property in excess of the deposit that you collected? Break even on cash flow is not acceptable because there are too many other unknown expenses that you will be paying.


The RE market here is going up so fast I am almost indifferent to the cash flow situation. To make $100k profit in 3 years I am willing to lose a little each month. I am more concerned if anyone with more experience than me out there thinks the above financing terms are on par or not.

But I do appreciate you playing devil’s advocate! I have another rental and had to deal with some unexpected costs, but overall I am just staying focused on the profit I’ll see when I sell in a few years.

The problem with this scenario is that as the mortgage rates go up, it will be harder to get top dollar for your property. When mortgate rates are cheap, people can afford more property, so property values go higher in relation to overall inflation. When mortgage rates go up, people cannot afford as much house, so property values do no rise as fast and may decline. You may get to a point that you cannot afford the difference between your costs of holding the rental property and the amount of rent that comes in, and you can’t afford to sell because the market is soft. If you buy this propety, you are gambling that interest rates will stay at current levels for several years and that you can sell the property before they go up. It is not unusual for property values to fluctuate 10 to 15 percent. What would you do if your interest payment went from 1500 per month to 2000 per month and the property value went from 300,000 to 270,000. That is only a little over a 2 percent increase in interest rate and 10 percent drop in property values. Markets are cyclical in nature. Right now many Real Estate markets are at the high level of the cycle, fed by low interest rates. If you are sure that interest rates are not going to go up, then by all means buy the propety. On the other hand, if interest rates are going to go up in the next 3 years, then you need to get a fixed rate mortgage if you are going to buy properties now. Somewhere I read that the time to get an adjustable rate mortgage is when interest rates a dropping. Get a fixed rate mortgage when interest rates are going up.


That is good advice. Maybe I will pay a little extra interest but get a fixed 3-year ARM or something instead of the month-to-month deal. I am also looking into COSI loans, which seem a little more predictable, and have caps on the amount your payment can increase.

Look into an MTA loan very stable index I like it and have all my homes on it . If values are going up that quick and you plan on selling in 3 years neg am is not that big of a deal. On my homes I pay the min pymt and sell in 3 years. I get all the cash flow I can then dupm it.

If your goal is truly to hold on to the property for several years only , your thoughts should lean more towards an Interest only loan not a conventional note .The RE market in that area is very very GOOD , that being said , your concern is the Appreciation value on the property , not building equity from paying down a note ! There are MANY MANY financial vehicles out there that will help any investor enter this market !

Good Luck !

The great majority of adjustable are indexed on either MTA, LIBOR or COSI/CODI/COFI. There are a number of sites that compare and chart the performance of each.

You will find the highest volativity in the LIBOR indexes followed closely by MTA. CODI and COSI are roughly benchmarked off what banks pay out to saving vehicles like a CD and have a dramatically smoother curve - lows not quite as low, but highs not nearly as high. To illustrate my point 01/2004 to 01/2005 had 100% plus change in MTA and LIBOR and less than 10% change in CODI/COSI. I am least familiar with COFI, but I suspect that it would be an intermediate.

A good CODI based product would be fully indexed at about 5.01 today.

Shop and make sure you break the loan 80/10 to avoid PMI


With these types of loans if you excersise the minimum neg am option they tack the difference onto your balance (neg am) and no one ever discusses this but when you have a mortgage or credit card and the balance is above the original line applied for it negatively affects your credit score BIG TIME!!! and if you are looking for future investment properties it’s a good idea to keep your Credit scores up not down. The other mis-conception with these loans is that they recast constantly and your payments can go up 2 ways:1 because of the index and 2 because of the recast feature! If your balance is going up each month so will your payment. If your loan reaches that magic number, usually 25 percent over the original balance the company can and will accelerate your payments. Oh yeah don’t foreget about the nasty pre-pay’s.