The fixed rate versus ARM decision
If you sort out your investment property goals, the seemingly bewildering array of mortgages available should narrow down quite easily.
You’ll first want to determine your time horizon for your investment property. Are you planning on holding the asset for many years, possibly renting it out in the process, or are you considering a quick turnover of the property? Once you determine this essential element, as well as develop a budget that keeps your monthly investment expenses at a level that’s comfortable for you, you’ll be able to make your mortgage decision much simpler.
With the average life of most mortgages being about seven years, for most investors the safety feature of a standard 30-year (or 15-year) fixed rate loan is usually not worth the higher rate and monthly payments associated with it. Of course, in the case where you plan to create an “evergreen” source of cash flow income by renting out the property for many years to come, and you don’t plan on the need to refinance the property in the short-term, the 30-year fixed rate loan may be right for you, especially with rates currently at all-time lows.
Shorter time horizons…
However, if your time horizon is short-term, then you’ll certainly want to
seriously consider an ARM (adjustable rate mortgage). ARMs come in all shapes and sizes, with rate change periods generally starting at one year. There are numerous split rate ARMs, where the initial rate is lower than a 30-year fixed rate, and is guaranteed for a period of time (for example, three, five, seven or ten years), and then converts to a one-year adjustable rate loan thereafter. Of course, this type of loan has it’s dangers, as evidenced by the financial crisis of the last few years. You don’t want to be overextending yourself as rates bump up – especially if your property is, in the short-term, potentially losing value. A good mortgage banker/broker is essential here to better explain the pitfalls of ARMs, as well as help you in your decision-making as to the best ARM for you.
The time to be sorting out mortgage plans…
A good time to sort out these different mortgage plans available is before you even start looking for your next investment property purchase. The mortgage broker/banker is available to educate what mortgage products are out there at any given time. In addition, you’ll only be frustrating yourself and others in the investment process if you don’t know exactly what you can comfortably afford.
The mortgage professional will help by initially running a credit check early in your investment property search. This will help determine if you have a clean credit report, or if a red flag will be raised that will require a borrower to clear up some potential problems. Too many investors wait until they find a property they feel is a great deal before meeting with a mortgage pro. Big mistake. Why waste your time if you’re not absolutely sure you can afford the property?
Creating the wish list…
Mortgage broker/bankers also like to go over with potential borrowers
their wants and needs list in what the investor is looking for. Is it a long-term rental? A simple fixer-upper? A complete rehab job? This helps clarify exactly what they’re looking for as they begin their quest. At the same time, the mortgage pro will usually discuss the investor’s financial comfort level, and where it lies in relation to taking on a new mortgage.
Finally, after obtaining a mortgage pre-approval letter from their lender, a property investor can call their mortgage professional just before they place an offer on a property. In this way they can go over the most up-to-date interest rates, and what their exact monthly mortgage payment would be.
photos courtesy of mortgagenotebuyer.org, heliodeaguiar.blogspot.com, ideachampions.com, raanana.muni.il
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