Questions on decisions on 5/1 arm vs 30 year fixed

[Buyan Thyagarajan]

Hi Guys,

I am looking at a refinancing on my property in PA area where I am considering a 5/1 arm vs 30 year fixed loan option. I am assuming 5/1 arm is a better option given the interest rates are subject to change with Fed decision and this will give me a lower monthly payment option. The only con which i need to confirm is whether 5/1 arm interests can be deductible from a tax stand point. 30 year fixed is an option but the interest rates on commercial are around 8 to 9 percent compared to 5/1 around 6 percent. Any thoughts on pros and cons on 5/1 vs 30 year fixed given these economic conditions?

Buyan

[Riaz Gillani]

Does the property cash flow at the fixed rate option? Are you content with the returns? Better the devil you know than the one you don't.

The interest is still tax deductible (though I'm not a CPA). 

ARMs are a valid option. Lower rate during the teaser period and an opportunity to see rates lower than what is available now. But, I wouldn't count on that second part ...

They're most suitable for investors who are receiving a windfall in the next few years and may want to pay off the property before the fixed period ends. Also for people who may retire soon and really want to take a mortgage out for the tax deduction. 

In the investor space, there's more favor towards IO ARMs - truly maximizing cash flows in the short term.