3 Year ARM vs 5 Year Arm

[Erik McKenna]

I am purchasing my first building bigger than a 4 family but I think this should be thought about for any purchase using a commercial loan.  This will be my third investment property.  I am trying to decide if I should go with the shorter loan with lower rate or a longer term with a higher rater that cant go up as quickly.  I know we have been in a very weird (in all aspects of life) time lately but generally, interest rates have been pretty low for the few years I have been doing this so its tough for me to think that they are going to sky rocket in the future.  That being said I cant predict the future so absolutely they could. 

For those who love information.

12 unit Building

490k Purchase price

Loan 392K

3 year ARM @ 4.75% = $2,235 / month

5 year ARM @ 5.25% = $2,349 / month

The 3 year obviously has an advantage of $115 saved a month that I could use to help bulk of savings for any unforeseen event.  The other aspect I like is the fact that I can refi sooner and save an additional (roughly) $175 ($2,058 / month) a month if rates stayed the same.  If rates jumped up to 5.5% my payments would end up around $2,220 a month which would be pretty much the same.

If I chose the 5 year that would force me to wait an extra two years before refinancing but would drop my payments to $1,950 at 4.75% or about $2,130 if rates went up to 5.5%.  

It seems like the 3 year is the way to go but not being able to control where rates go in 3 years makes my mind race. 

Would love to hear everyones thoughts and how they weigh their options!

Thanks

[Joe Splitrock]

@Erik McKenna is this an ARM or a commercial loan with 20 year amortization and 3 or 5 year term? There is a difference. An ARM does not require you to refinance. The rate just adjusts after the fixed term. Many ARM loans have ceilings on how fast or how high the rate can go, which is the important detail. If this is a commercial loan with 3 or 5 year term, you will be required to refinance at the end of that time. Assuming it is a commercial loan, go for the 5 year term to buy yourself more time. Three years is just too soon and if you get caught at a bad time it could even be difficult to refinance. Also keep in mind there are loan closing costs for refinancing which is several thousand dollars generally, so the $2736 you saved will all go to closing costs. Five years offers more time for the property to appreciate.

Also remember that regardless of loan type, you can always refinance at any time. It is just a matter of if the closing costs and terms make sense. I just refinanced a property that had 29 years left on a 30 year term.