What do you guys think a 20% down and a pay option ARM will do to my cash flow business in the long run? It seems that this is the only way I can cash flow going through a lender. Is this a good idea or not?
Since you can get an Interest only loan that has a FIXED rate for at least 5 years that is as low or lower than any of the Option Arm Products (different lenders have basically the same product with different names). I assume you are stating you can only cash flow positive with the MINIMUM payment option.
Personally, I think this is very dangerous as the deal must be very thin.
If it takes the minimum payment to make a deal, perhaps it isn’t one to start.
If you are just choosing to go with the minimum because you have a better use of the funds, that is different.
Ben,
The pay option arm has its good points and its bad points. It will increase your cash flow every month based on the minimum payment or the interest only payment. However, by doing the minimum payment you are adding the difference between the minumum payment and the amortized rate back on your loan principle. Depending on where you are buying and how the property is appreciating it can swallow that neg am and you can break even. So when the time comes to pay off the loan or sell the house you will be almost even. Its like you are borrowing from your future property appreciation now instead of waiting for it in the future. The main downside is that as the indexes (MTA and LIBOR) continue to rise so does your interest rate. Right now your qualifying rate would be in the mid to high 6’s. With 20% down you could get close to that on a fixed rate conventional loan. Hope this helps. Also opposing points of view are welcome.
When my payments increase, couldn’t I just raise the rent to combat it?