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Updated over 8 years ago on . Most recent reply

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66
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18
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Ray Jansma
  • USA
18
Votes |
66
Posts

ARM mortgage financing then cash-out refi?

Ray Jansma
  • USA
Posted

I want to get into the BRRR strategy. What's the best way to finance your original mortgage on a a property? With an ARM rate if I plan on cash out refinancing anyways within a year? That way I can save on the interest rate? Or are there rules with ARMs that you can't do that and I would have to do a conventional loan during the original purchase? I'm not well versed in ARMs. Someone please offer some advise! Thanks!

Most Popular Reply

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21
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27
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Nelson Barss
  • Syracuse, UT
27
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21
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Nelson Barss
  • Syracuse, UT
Replied

I'm also excited about the BRRR strategy. I haven't yet closed my first deal, but I have one under contract. I am a conventional mortgage lender (by the way ARM's are conventional loans, just a different "flavor." I've been researching all the options for a few months now - hopefully I can settle on a strategy that works, and then"repeat" over and over successfully. Here are some thoughts.

In my mind, the interest rate is less important than the closing costs on the initial (short term) loan. ARMs (especially on investment properties) tend to come with some pretty hefty closing costs...so this would be the opposite of what I want on that initial short term loan. I've tried quoting ARM loans to investors over the years and there have been times when I couldn't even offer the loans without 2 or 3 discount points....which can make the closing costs more expensive than some hard money! At least with hard money you're not limited to 75% loan-to-value as you are on Conventional ARM's.

I'm financing my first deal through Hard Money.  The fees are 2 Points due at closing and 12% interest rate.  One of the reasons for this is that I don't think the underwriters on conventional loans will approve the property in it's current "un-rehabbed" state.   Another benefit is that I'm able to borrow 100% of the purchase price (this preserves my funds for the rehab.)  There might be better ways to finance this one, but it's more important to me to get this deal closed - and the hard money is way quicker and easier.  Before I take on property #2 I'll take a step back and see if I can improve on the process.

So that's one option - but an even better option would be to work out a seller-financing deal.  Perhaps you can find a seller who will agree to a deal that give them their "equity" now...but leaves their mortgage in place for a 12 months or so (just until you can bring the house up to conventional lending standards.)  Then you only need to pay one set of closing costs when you pay then off with your permanent loan.

A third option that would be even more ideal would be to arrange private funding from a friend or family member who has money to invest (or multiple people could pool their money).  In my mind I feel like I probably need to get a few deals under my belt before I can even think about this, and I'd want to involve an attorney in setting up the agreements.  This would probably be cheaper than a hard money lender, just as quick to close, and have no points.  If it turns out well for all parties, you could use the same investor or investors to fund all your deals over-and-over again.

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