I am new to real estate investing. I am renting a townhome for $800 a month rent, and the mortgage payment is $691 per month. On top of the mortgage, I also have to pay $110 per month for HOA dues. I would like to somehow get my payments down at least $100 per month to get some positive cash flow. Currently I have an 80/20 mortgage/HELOC with a rate of 6.24% on the first mortgage (30 year fixed) and an adjustable rate on the HELOC (right now its at about 7.25%). I know I probably can’t get anything with a lower rate right now, but I was wondering if an Option ARM might be a good option in this situation. I would like to continue to build equity in the property, but I would also like to get positive monthly cash flow. Any ideas on what I should do?
I’ve got an option ARM @ 4.5% fixed for 5 years up to 100% LTV. That would lower your payment a bit and not take out as much equity as the 1% option ARM.
How much would the payments be on a mortgage for $108,000 with a 4.5% option ARM?
$468 if you are at 80% LTV. If it goes over, we have to do a 2nd mortgage
Where are you located? You should not need an option ARM to get positive cash-flow if you are not in an area of extremely high appreciation and inflated prices. Just remember an option arm has negative am, meaning if you make that minimum payment every month you will see your balance on the mortgage grow every month too. If you are new to this, and you decide to get an option arm, make someone explain it to you in detail before committing to anything.
Aaron
your 100% option arm (80 on the option ansd 20 fixed i gather) I am wondering if that is for a NOO and if you can do it on purchases. What is the required FICO? Stated or FullDoc??? give details of loan please
The townhome is in a new neighborhood near Charlotte, NC. There are new units similar to ours selling for about $120,000, but I don’t know if ours would appraise for that much since it is not new. I have called a few mortgage brokers to see if I could lower my payments, and some of them recommended the Option Arm, but the idea of negative amortization makes me a little nervous. I have a pretty good interest rate right now and I am building equity, but I have slightly negative monthly cash flow. I was thinking about keeping the current mortgage until the lease term was up (Feb. 2008) and then either trying to sell or do a lease/purchase if the value goes up. If the property does not appreciate then I might just continue renting and increase the rent. In the mean time I was going to see if there was any way that I could get the mortgage payments down a little.
Since you already have a good interest rate, the only way to lower your payment any further would be to go interest only or go neg-am. The 4.5% Option ARM has only slight negative amortization as opposed to the 1% Option ARM which has a lot of neg am.
I can get exact numbers for you if you can give me all the details.
BTW, whats going on in NC? I’ve done several deals there recently…just finished one in Charlotte.
~Aaron
Are you looking for financial advice or just looking to refinance your property?
Getting into an option arm would mean you’d be giving up building equity in your property. You’d also have some expense associated with getting the mortgage. If rates were to fall more, it might make sense but the rates now aren’t much better than what you have. I’d have to say they’re actually worse.
You should probably just sit tight and ride it out. If you need more cash flow, lower your tax withholdings as you’ll get some good interest and depreciation writeoffs at tax time.
I would say in my opinion that an option arm is a bad way to go on any loan. Pay me now or pay me later. the neg am will kill your appreciation for resale. I personally only think there are a few situations in which an option arm would benefit a borrower in the long term.
Options you may try are first and probably the best for anything long term is pay down some of the HELOC second which would lower your payment.
Second is maybe look into a 40 or 50 yr mortgage. many are still due in 30 yrs but the amor is over the 40/50 yr payment. you wont be adding money to the amount you owe you would just be extending the paymet time longer. thus the payment made in 30 yrs is higher than if its paid over 40 yrs. this may get you where you want to go since you aren’t looking to hold the property forever. You would just be paying less principal monthly. However, you dont pay much off in the first few years anyway.
You can also go interest only but being that you dont have the property a long time the interest only payment may not get you to where you are going.
I was also looking at the 40 year mortgage, but I would end up with a higher interest rate so I wouldn’t really save much on the monthly payments. Another idea I had was to refinance my primary residence and use some of the equity to pay down the HELOC on the townhome. We bought a foreclosure for $156,000 about 6 months ago and it is worth about $170,000-$175,000, so I was thinking about refinancing and taking out some equity to pay down the HELOC on the townhome. The only problem is that the refinanced interest rate on the primary residence would probably be higher than the rate we are paying on the townhome’s HELOC, so it might not be worth doing. I think I am better off just keeping the current mortgage on the townhome. Once we write off our expenses and depreciation, the money we will save on our taxes will offset most of the negative cash flow, so we will probably come out ahead. If the townhome appreciates then that is a plus also.
you don’t have enough equity in your home to get much of(if anything out) thru standard temrs of HELOC (usually up to 90% LTV).
as for your loans, you have really good rates…kind of looks like Owner-Occupied type rates…
you best bet is to sit tight.
this is probably your best bet. I am sure you will get a good savings on your taxes and it will balance out.