30 yr vs ARM

[Rajiv R.]

Purchasing a new townhome and received the following as best so far:

- 6.875% 7/1 ARM

- 7.35% 30-year fixed 

I am aware of the risks with the ARM and plan is to either refi when (if) rates drop, or sell around year 5 (along with others I plan to purchase) to get into commercial or larger multifamily. There is a small chance I keep this one and continue to build the portfolio.

One lender is pushing the 7/1 and the other tells me an ARM isn’t for investment properties. Everyone has their incentives so wanted to ask here for some unbiased advice. 

[Robin Simon]

Quote from @Rajiv R.:

Purchasing a new townhome and received the following as best so far:

- 6.875% 7/1 ARM

- 7.35% 30-year fixed 

I am aware of the risks with the ARM and plan is to either refi when (if) rates drop, or sell around year 5 (along with others I plan to purchase) to get into commercial or larger multifamily. There is a small chance I keep this one and continue to build the portfolio.

One lender is pushing the 7/1 and the other tells me an ARM isn’t for investment properties. Everyone has their incentives so wanted to ask here for some unbiased advice. 

Thats a pretty big difference in rate that may make the ARM worth it. Key is to understand all the aspects of the ARM

-Is there ceiling or floor?

-What does the rate float to - what is "Margin + Index"?

-What is the prepayment penalty look like if rates drop over the next seven years and you want to refinance?

All of these factors are very important in evaluating a question like this - always best to get the clear and complete picture!