7/1 ARM vs 30 YR fixed... opinions?!?!

[Josh E.]

Hey BP - I just went under contract for my 3rd large duplex in Utah, this one for 378,000. I have a choice in my financing: to do a 7/1 ARM or a conventional 30 year. My other 2 properties are on 30 year fixed. I have no idea if or when I will plan on selling this property I'm currently buying, but if it appreciates half as much as my other 2, I could easily sell it before 7 years are up and 1031 to something bigger. But not having the fixed amount for 30 years is a little unsettling considering I don't know what will happen in the future. Details: (with 25% down) 7/1 ARM - 3.625% rate, p&i 1292.91 30 year fixed - 4.25% rate, p&i 1394.65 So With the ARM I would save 100/month on cash flow, or 8400 in the 7 years of a fixed rate. After 7 years, the ARM can go up a max of 2%/year with a max of 9.625% over the life of the loan. So look into your crystal ball and let's talk about what you think rates will do over the next 10 years.

[Logan Turner]

Don't speculate interest rates. Lots of smart people disagree on the subject. What can or will you do with the extra $ 100/month? Can you put it to use?

Run your worse case scenario. Rates rise and your loan increases year 8,9,10 and now your at 9.8 percent interest. Project rent growth at 2 percent. Look at your amortization schedule. Will you cash flow still? Could you 1031 exchange it before that happens?

Now run best case scenario.... does the potential justify the risk? Can you find a way to be successful in either scenario? Which scenario is more likely.. not what you would prefer to happen. Try to remain non biased.

I say go fixed. The benefit isn't great enough and you could lose your property if the market flattens or dips and rates go up. (Price goes down) rents don't grow enough to cover your costs. You sell at break even.
Vs you do the fixed and who cares about pricing. You cash flow. You have more choices. If rates go up, great call getting locked in at 4 percent. If rate drop, go refinance later and take advantage of them. Win win