DSCR LOAN or 5/6 ARM LOAN

[Leon Huggan]

what the Pros and cons 

[Brandon Beardt]

Quote from @Leon Huggan:

Ii am buying a rental property because of an ongoing civil litigation suit the HOA Fanni Mae wont back conventional loan

the options the lender is offering is 30-year DSCR 30% down 7.125% interest or 30-year 5/6 ARM 30% down 6.875% interest.

 Hi Leon,

DSCR Pros: Fixed rate for 30 years, fully amortized. You don't have to worry about rate hikes or your loan adjusting during that time.

DSCR Cons: Higher interest rate. Prepayment penalties that last around 5 years or so.

5/6 ARM Pros: Lower initial rate for the first 5 years of the loan.

5/6 ARM Cons: Adjustable rate every 6 months after the first 5 year period. You're subject to rate increases after that. Prepayment penalties.

I would imagine either option works for you. I always lean towards the 30 year fixed because chances are, you aren't holding onto that loan the whole 30 years. If rates increase drastically after that initial 5 year prepay period, you're set on the rate you have instead of having to refinance out of the 5/6 ARM. Alternatively, if rates go down, you can easily refinance. Different strokes for different folks but the 30 year fixed gives you a better safety net IMO, especially considering the rate is only .25% higher. Best of luck!