5/1 ARM or Fixed Rate??

Question

Hi!  I am a first-time investor and have to decide whether to go with a 4.5% 30 yr fixed rate with 25% down on a multi-family or go with a 5/1 ARM 4.25% 25 yr amortization schedule with 20% down.  I plan on holding the property very long term.  So definitely I will have to refinance the ARM if I go that route.  Once I add in the likely cost of refinancing, the cash on cash return equals out.  The benefit of going with the 30 yr is that I keep my great rate, but it is more cash out of pocket - but payments are lower.  The benefit with the ARM is less cash out of pocket, but I will have to refinance and the payment is higher because of the lower down payment and shorter amortization schedule.  Not sure what to do...Any feedback?

Tyler Weaver · Answer

I have both fixed and ARM products in my portfolio. For me to choose an ARM I met thse criteria. Lower interest rate, lower closing costs, forced apreciation during the locked in period.  Refinancing is likely in the short term on the loans I took ARMs on.

Ryan Ball · Answer

I would go with the fixed rate. You are not getting much of a break on the rate for the ARM. From a cash flow perspective the shorter amortization makes a lot bigger impact than the 0.25% rate difference.

Stephanie Franckewitz · Answer

Huntington and Cincinnati Federal

Jered Sturm · Answer

@Stephanie FranckewitzOur company holds a sizeable portfolio in Cincinnati. I see you're in Loveland. Do you mind sharing where you are getting those two loan options?

Jered Sturm · Answer

Fixed rate between these two options. I would need a large discount off the 30 year fixed for the additional risk of an adjustable rate. Locking in fixed rate debt for 30 years at 4.5% is a great investment.

Russell Brazil · Answer

I'd go with the 30 year fixed in this scenario. To go to a 25 year amortization with a 5 year adjustment I would want a much larger reduction in the interest rate than .25%.