Portfolio ARM to good to be true?

Question

I have an opportunity to do and 5 year ARM with my bank with 30 year amortization.  No Fees for anything as it is Portfolio loan and been banking with them for over  8 years.  Bank Manager handling the loan.

It is the only type of portfolio loan the offer.   What are pit falls of  going this route over a 30 year conventional other than  interest rates possibly rising up to 2% every 5 years?

This is My primary home.  Also considering this on investment rental income  property I own free and clear and 2nd home.

Thanks

Jesse T. · Answer

I thought Condotels were set up that way from the beginning.  It is a condo that can be used as a hotel by the operator of the building and there is an arrangement were any "room nights" are shared with the owner.  In theory it sounds great, but from what I have heard they are a lot more like timeshares than investments.

Conventional means you qualify based on the property and your debt to income and the loan can ultimately backed by Fannie Mae or Freddie Mac.  Portfolio means the bank will hold the loan - so they can be more(or less) flexible with terms and requirements.

The ARM vs. fixed is a separate component.  Conventional financing offers both options.  Portfolio financing generally will not be fixed for the entire amortization of the loan - it may even have a ballon.

Franklin Romine · Answer

Gl L.

Have you exhausted all of your good debt financing options?  Conventional loans?

Frank

Levi Bennett · Answer

Does the lender know that it's a condo-hotel? Most lenders won't touch them.

Also, to repeat what everyone is saying.. what are your long term goals? If it's a 5 year ARM then you need to know what your 5 year plan is. By all indications it's likely that interest rates will be [significantly] higher in 5 years. They're good for flips or <5 year investments, but... other than that, why risk it?

GL L. · Answer

It was not orginal set up as condotel and are all indvidually owned condos built in 70s.   The local lender is clueless and trying to convince me he is right.  Cannot get loan from someone fighting you on terms.   My bank manager  is working with me on  Portoflio ARM sound like it is not a bad deal from what I am reading and worthwhile to pursue.   Thanks

Jesse Gonzalez · Answer

Gotcha, condotels are ineligible for agency lending, that's probably the reason why you must go portfolio.  I would be interested to find out if it truly is listed as a condotel or simply a non warrantable condominium complex because of the occupancy ratios.  A little secret out there that most aren't aware of is that Freddie Mac will finance non warrantable condos whereas fannie mae will not.  What I'm saying is that it may be possible for you to receive agency funding of some type.

GL L. · Answer

I have conventional option as well.  Maybe harder as a lot of the condo units are being used primarily as vacation rentals.  I have used primarily as primary home until recently. Now renting rooms on Airbnb some (see link below)     and plan to have 2nd home in texas.    They call units with a lot of vacation rentals in them "Condotel"  (not sure of spelling)  They are leary to do conventional in this case for these types of units.

Why is it important to exhaust  conventional loan option route  instead of ARM?  What am I missing?

BTW this a cashout refinance also w/ opportunity to lower rate I am paying now for  past 10 years.  I am cashing out 150k to go toward downpayment/purchase of 2nd home/investment property  in tx.  Also considering portfolio loan for 2nd home in tx through same lender in Ut.  Should I go for conventional for 2nd?  I can get the same  No Fees if go with ARM portfolio.

Aaron Hall · Answer

No fees look nice up front but what does that mean will happen to your APR?  NO fees now can means $$$ interest over the life of the loan.

Get a conv 30 year quote so you can compare.  The rate can make all the difference.

John Ching · Answer

GL, I'm with Jesse Gonzalez (I also do conventional lending). You need to provide a little more information for us, mainly the long-term goals for your primary residence.

Contrary to popular belief, (most) ARM's were not a major contributor to the great financial disaster of the past decade. The reason being is that nearly all ARM's originated on the past 10 years or so have actually seen their rates remain the same or decrease slightly. Yes, I know, hard to believe based on the media hype.

Is there a reason you are going with a portfolio product vs. conventional lending? Would you not qualify? What are the reasons for refinancing now? Are you cashing out? Paying off debt? We need details to offer the best advice...

Jesse Gonzalez · Answer

Depends on your long term goals and why you would choose to go with the portfolio lender.  Are you planning on staying in the house for the long term, you want to be there and don't see yourself moving in the next 5-10 years or longer?  Typically portfolio loans are taken by people who need a loan that doesn't fit into the fannie/freddie box or they are receiving a really good offer from the portfolio lender so much so that it blows anything else out of the water.

Portfolio ARM to good to be true?

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