Is a 7/1 ARM ever a good idea?

[Dan Marr]

Hello,

A local credit union offers a loan program for first time home buyers with 10% down, no PMI, and a 2.25% 7/1 ARM. I plan to hold on to this house as a rental after living in it for a year or two. The low interest rate will help significantly with cash flow, but I am not sure if it is worth it with an ARM. I could always re finance before the 7 years are up, but do not want to be forced to sell at 7 years due to high interest rates if the property is still providing good cash flow as I expect it will. Would a 7/1 ARM be a good idea in this situation?

I could also put 10% down on a conventional loan with no PMI and take the normal interest rate probably around 3% and cash flow would work, but not as good and I will probably have to pay less for the house meaning my offer may not be accepted. Any help and guidance is very much appreciated!

[Reid Chauvin]

If you're planning to hold the property for the foreseeable future, then a FRM is likely the more prudent bet. Regarding putting 10% down with no PMI, that's not the case. PMI is required when you put anything less than 20% down. You can opt to pay it monthly or buy it out upfront.

As a first time home-buyer you can put as little as 3% down on a conventional loan without there being income restrictions. I'd suggest asking your lender for several estimates with different down payment scenarios so that you can make the best decision for your situation.