I have a rental property I have owned for 6 years. At the time of purchase I had only planned on keeping the property for 5 years so I used a 5 Year ARM at the time. I have decided to keep the property. I need to refinance because my payment has become higher than my rental income. I am not sure what type of loan to refinance with. I have 80%LTV with a mid credit score of 680. I was thinking Option ARM but I didn’t know if that is to risky.
Any suggestions on financing a long term rental?
In my opinion, option arms are great financing tools for short term financing. If holding long term then a 30yr may make more sense if your property still cash flows.
Stay far away from option arms. They are a horrible program. If you want a great program get in a 5 or 10 year interest only. The reason I say stay away from option arms is that they work off an index and margin which equals your interest rate. There are introductory rates of 1% or 1.25% and then they adjust to the margin and index.
ex: MTA option arm
1% intro rate for first month
Second Month
Index is 4.38
margin will be 2.5-3.5 depending on lender
= 7.35% interest rate minimum when it adjusts.
You just locked yourself into a constantly moving rate that is awful. People say the option arm is great for investors. Bull… You have a possible negative amortization that allows you to actually accumulate more debt on your mortgage. Awful program and don’t go with any lender that suggests it as they def. don’t have your best interest at heart. Try a 5yr or 10yr int only and should be able to get a rate around 7-7.25%. Good luck.
young,
You make some good points regarding the option arm, and in the case of this investor the option arm is not a good product fit; however you are not looking at both sides of the coin. With the option arm when you make the minimum payment you are rolling some interest back onto your principle, but you then have access to that cash now instead of when you sell the house. This is important for several reasons… the most important being that equity in a home has no rate of return, it earns you zero when it is tied up in the house. So essentially you would be borrowing against your future equity now. As we all know due to inflation money will be worth less in the future than it is today. So if this investor wanted to use that extra money to invest or to purchase more properties as a short term goal the option arm would be a great short term product solution.
Thanks, Everyones advice has been helpful.
Match,
Where are you located? If you are in high appreciating areas and you are planning on keeping the house for at least 5 years, I do not see why the option ARM is so horrible. As Chris said, it opens up more money for investment and provides a better cash-flow, but yes, you do not gain as much equity in the house as an interest only payment or 30 year. And yes, the indexes keep rising, but the only reason you would want the option arm is to make the minimum payment for the cash-flow. Anyone not using the option ARM for the min payment, should definately get out of it.
I am in North Carolina. Appreciation is not double digits, but it is appreciating slowly.