Help With Lender Options

[Eric Chow]

Hello Everyone, 

I am a newbie and about to make an offer this week on my first rental property (duplex)! I have a couple of options for financing that I would love to get some advice on. To keep it simple I basically have 3 options:

1. Conventional loan which I was quoted at 4.375% for a 30 year fixed loan

2. A variable loan that is fixed at 2.25% and has a variable piece that is based on the SOFR index (right now at .1) 

3. A loan at ~3% interest but only fixed for 5-7 years. 

My thinking on this is to go with option 3. I'm basically taking the risk that in 5-7 years the interest rates won't be crazy high, but worst comes to worst at that point, I could just pay off the property (loan is for ~150K). The interest rate for the conventional loan just seems a bit too high to me but obviously gives me the stability and safety of it being 30- year fixed and I can always refinance in a couple of years if rates go down. 

Not sure if the more short-term fixed loan for the significantly lower interest rate is worth it so any thoughts or advice would be really appreciated!

Thank You,  

Eric

[Will Kenner]

@Eric Chow I agree with @Scott Johnson. Locking in a 30 yr fixed gives you stability on which you can more accurately forecast expenses going forward. Most likely with our inflation, rates in 5 years will make 4.375 look like a rock bottom rate. There is the option to roll the dice with an ARM but in this environment I don't think that's wise. With the interest only, you have the worst of both worlds despite an initial low payment: you don't pay down principal nor build equity, and you will be faced with a higher rate in the future when you re-fi. That will equate to a steep increase in monthly payments.