Re: Loan Program for Rental Property - Posted by Dave T
Posted by Dave T on June 01, 2007 at 18:05:48:
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.