ARM vs FRM

[Eric Jacobson]

Can someone please describe to me the thought process they go through when deciding on whether to finance a property through fixed or adjustable rate mortgages? More specifically, I'm talking about residential single-family investments. Now my understanding is that ARMs typically offer lower rates to the borrower because much of the interest rate risk is transferred from the lender to the borrower. This spread between the ARM and FRM rate also will depend on variables such as the index, the margin, adjustment frequency, and any interest rate or payment caps. It seems to me like if I'm going to have a short holding period (1-3 years) that I would want to take advantage of the ARM, especially if there is a good teaser rate, because the interest rate risk will not be high enough for this short time to justify me paying more for the FRM and a stable payment. Now, I don't have any investing experience (yet) but I'm looking to start soon after graduating so I was hoping for any real-life insights on this topic. Especially now where rates are so low and the fed looks to stop its program of buying mortgage backed securities in March, the fear of rising interest rates has hit us all. I was wondering how this might also affect the decision of ARM vs FRM. Thanks!