First time buyer - What Loan works best for me?

Question

Hello all!

First time buyer and first time posting here. Came across BP on YouTube then started reading a ton here!

I have been looking for a starter home/investment property and a deal has come up that looks decent. I haven't done as much homework as i should have on the loan side of things. I am trying to get quickly caught up on  terms and rates. I want to avoid giving the banks as much interest as possible!  ( dont we all)

The House in question is a duplex that is rented out both sides till June of next year. I fear if making an eviction a stipulation of purchase the deal will go south. Therefore FHA is out the door. I do have the funds for 20% down on the property and will move into the smaller unit once the lease has run its course.

I am still going to be renting until i can move in so i am spending around 1200 on my rent and i am netting around 500 ( Figured out with 5.4% 30 year Fixed) on the house while i wait to move in. In the end i will probably be refinancing within 5 years once i fix up the house and get ready to take on a second multifamily unit.

Real question is i see people saying an Adjustable rate not being such a good idea but if im planning on refinancing before 5 years anyway wouldn't this be a good way to avoid paying interest? This is assuming the current rates at my bank are ARM5/5 @ 3.750% and the 30 year fixed is 5.4  and they do not penalize me due to not being primary residence due to the tenancy.

This is probably been hashed-out a few times over, apologies.

-Mike

Charlie MacPherson · Answer

@Michael R Gisselberg  It would be, but the question in my mind is what rates are going to be in 5 years.  With rates rising, my inclination would be to lock in a lower rate now.

If you were *definitely* going to sell (not refinance) in 5 years, I'd agree that the lower adjustable rate would be the way to go.

Charlie MacPherson · Answer

@Michael R Gisselberg With an FHA loan, you'll have to owner-occupy fairly soon after closing, so as @Jaysen Medhurst suggested, if the home passes inspection and appraisal, set your closing date for the expiration of the lease in the unit you want to live in.

The risk to that is that the tenant doesn't move out in time.  You should stipulate that the unit is delivered vacant.  Do a walk-through the morning of closing to be sure the tenant is gone and everything is as it should be.

If the tenant hasn't vacated, you should do a holdback of enough funds to cure the issue - in this case, an eviction, plus whatever living expenses you incur.

The other issue is your rate lock.  There's not much you can do unless the lender offers you the ability to extend the rate lock - for a fee, of course.

Interest rates have been rising, not falling.  I don't know of any reason for that to change, so keep those rates in mind.

As far as adjustable rates, that's a call you'll have to make.  If it were me, I'd be wary, given that rates are increasing.  Personally, I'd look for a 30 year fixed rate loan.

Jaysen Medhurst · Answer

Hi @Michael R Gisselberg, an adjustable rate can be a great tool, if you know you won't be there forever. In your case a 5/5 may be really good. Check the details of the loan for how much the interest rate can rise after 5 years. If it's 1.5 or less, then your guaranteed 10 years with a rate better than the 5.4 offered for a 30-year fixed.

Regarding the duplex you're considering, when do the leases end? Just write an offer with a closing date after the lease ends and stipulate that unit is to be delivered vacant. BTW: this isn't an eviction, it's just not renewing someone's lease. Completely different things.

Michael R Gisselberg · Answer

Just noticed that there is a template to follow hoping this helps.

Your goals and story:

Looking to start in multifamily by house hacking my first few duplexes and hopping to the next one.

Type of property: Duplex 3/2 and  2/2

Location of property: Texas

Purpose of financing: purchase

Type of financing sought: Not sure ARM  conventional 30/15

Current or prior ownership of real estate: No ownership

Occupancy: investment/owner occupied

Value of property at present and/or your offer price: $ 240000

After repair value: $

Anticipated or actual appraisal issues: no

Current rents per month: $ 2200

Fair market rents per month: $

Down payment or equity: 20%

Source of down payment funds, if applicable: Gift

Income Source: Salaried

Gross monthly income: $ 5800

Monthly debt obligations appearing on credit report, plus (if applicable) personal rent and alimony/child support/etc: $  1200 current rent and 500 on car(getting rid of this in a month)

FICO: good almost excellent

Credit issues:  None

Additional details:

Michael R Gisselberg · Answer

@Charlie MacPherson

Thanks for the response Charlie!

If i am Planning on refinancing under 5 years wouldn't the adjustable rate be irrelevant in my situation?

Michael R Gisselberg · Answer

@Jaysen Medhurst Thanks for the response!

Leases both are up  halfway through July . Wouldn't setting a closing date that far make the deal less ideal for the seller? (there is another offer in on the table as well) And i fear making a stipulation of terminating a lease early will cost the seller therefore making my offer less appealing.

Im thinking of doing the ARM and trying to refi out under the 5 year timeline for adjustment. I will live in and do updates  raise rent and appraise higher for cash out refi to move to the next duplex. I plan on holding for rental income after purchasing the next duplex.

I really do need to get better on crunching numbers so i can figure out specifics myself its just painful to learn the hard-way!

-Mike

First time buyer - What Loan works best for me?

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