Yes, an ARM is a terrible idea for buy and hold! Long term, fixed rate is best. Since it is not owner occupied it may be at a little higher rate, but I haven’t found that to be. It may depend on one’s credit score.
Buy and hold is the way to RE wealth over time. You and I don’t want our rates going up. Arrrgggghhhhh!
But the part I can’t figure out is that Michelle, the who asked the question, is talking about a tenant/buyer. That of course is NOT buy and hold. That is lease/option - a totally different concept than buy and hold.
Hopefully she won’t hold the property very long long… a couple years… so an ARM might work.
Loan Program for Rental Property - Posted by Michelle Wood
Posted by Michelle Wood on May 28, 2007 at 22:47:32:
I am going to purchase a home to buy and hold for rental property…what loan programs would you suggest for me to get to purchase the property…I already have an interested tenant/buyer? Should I get a convestional loan, ARM, etc.? This information will be greatly appreciated.
How long do you plan to hold the property if you already have a tenant/buyer? If you plan to lease option for a couple of years then sell when the buyer exercises their option, then an ARM should be OK. If you plan to hold forever, favor a 30-year fixed rate loan. The ARM rates and the 30-year fixed rates are so close these days that your cash flow is not significantly lower over the ARM loan product.
Consider your cash flow with each loan product, the cost of the loan (fees, points), and your expected holding period. Then choose the loan product that is the best fit for you within all these parameters.
By the way, I still have some adjustable rate mortgages that I took out in 1993. Yes, I did look into refinancing, but the loan balances are so low now that my monthly payment would not go down enough to justify the cost of refinancing.
I would not recommend the minimum payment feature offered with many “option” ARMs today. The minimum payment is often an interest only payment at a very low introductory rate. The problem is that the minimum payment is not enough to amortize the loan, nor will it even cover the interest only payment. In this case, the shortfall is added to your loan balance – negative amortization. If you should be offered an ARM with payment options, just beware that the minimum payment feature increases your loan balance each month.