5/1 ARM at 3.5% vs Fixed Rate at 5.75%

[Marcus Gaethke]

Hello Bigger Pockets - Thanks in advance for any advice

I am currently looking to get approved for a loan for a small multi-family (2-4 units) and am having difficulties finding lenders that will do a 30 year fixed with 20% down. Everyone I have spoken to is requiring 25% down. I have spoken with my local credit union and they allow 20% down on a 5/1 ARM (1/1/8) for investment properties. Below is the breakdown of the 2 options and it really seems like doing the 5/1 ARM is the preferred option but would like some advice and is there anything to worry about with an ARM that you wouldn't normally think about.

30 Year Fixed Rate:

Cost: $140,000 

Rate: 5.75%

Loan amount: $105,000

Down payment: $35,000

Origination fees: $1,995

Discount Points: $2,100

Cash to Close: ~$42,038

5/1 ARM:

Cost: $140,000

Rate: 3.5% for 5 years increasing by a max of 1% annually and the rate cannot exceed 11.5%

Loan amount: $112,000

Down Payment: $28,000

Origination fees: $1,800

Discount Points: $0

Cash to Close: ~$32,943

[Scott E.]

That is a very big difference in rate but on a loan this size, only amounts to about $150 per month difference in payment. The answer to your question is simple:

 -If you are planning to hold this property longer than 5 years, the 30 year fixed option makes more sense.

-If you are planning on selling within 5 years, the ARM is the right choice.