Zero money down adjustable rate mortgage. Good or bad idea?

[Spencer Glaser]

My bank is offering me a "special mortgage product" because I am an attorney. It is a small local bank in Memphis, TN and it has a good reputation. They have offered me 100% financing up to $250k on a 5/1 ARM at 3.55% or a 7/1 ARM at 3.8%. I understand that the teaser rates will go up after the 5th or 7th year, but I plan refinance to a fixed rate mortgage and be renting out both units by that time. From what I have read, ARMs are best if you plan to sell the house before the rates go up, so that is another possible exit strategy for me. My lender said there is no prepayment penalty and I am free to refinance at any time. I was also informed that if i do not refinance after the teaser period that the rate is tied to WSJ Prime and there is an annual interest rate cap of 2% and the lifetime cap is 6.5% over the initial rate, or 10.05% max.

I am looking to use this loan to house hack a $115,000 duplex. There are currently tenants in one unit paying $650/month and market rent is easily $700-$800 for each unit ($1400-1600 total). This loan sounds attractive because I don't have to put any money down. I can't really afford to put 20% down at this point and an FHA doesn't really look that attractive because of the PMI and the house is being sold AS IS and likely wouldn't pass FHA inspection. I will of course have my own licensed inspector look through the home.

Does anyone have personal experience with an ARM and should I stay away from this mortgage that sounds to good to be true? Is it a good strategy to refinance to a fixed rate loan before 5 year mark?