Exit Strategies for conventional ARM mortgages

[Sam Tang]

I'm looking around for a portfolio lender that will finance me for a non-warrantable condo and finally found one. The condo is in the $175-200k range. They offer a 10/1 ARM with a 30 year loan term at 4.25% with 25% down. What are some exit strategies I can consider for the ARM in case interest rates rise to unfavorable levels in the next 10 years?

Now, my primary goal is to buy and hold this property because it is in a great location with possibility of rail service being added within the 10 years to it (which I speculate will help the property appreciate). I don't think I will have any problem with equity requirements in the future. The property is also near a university so I should not have a problem having it rented to that crowd for cashflow.

Since the condo is non-warrantable, it will be harder to sell to the normal buyer. I would rather not put the extra cash flow towards the principal balance. How easy would it be to refinance out the ARM to another type of financing if rates trend upwards?

Thanks!

[Bill Gulley]

Sam, look at the index, what the rate is tied to and the margin, the spread of interest charged over that index to see where your rate might adjust. See if there is a ceiling rate, the highest rate they will charge, but there may not be a ceiling (or a floor being the lowest rate).

The thing is, that when rates rise, all mortgage rates go up. If your ARM adjusts upward you may not be much higher than the current rates on other loan products and then considering costs to refinance, it may be better to stay where you are.

Ask that lender if they have any roll over options to refinance at lower costs since they have the loan.

Then, there is always the option to sell. :)

[Sam Tang]

Thanks for the reply Bill, appreciate it!

This will be my first steps into the ARM arena, so I'm fairly unfamiliar with what options I have to minimize my risk after the initial interest rate expires. If the condo stays unwarrantable, am I stuck with the only other option of refinancing with a portfolio lender? Can I refinance into another ARM if it looks like the rates might continue to climb? Just wondering if there are any other options out there to get creative.

Another question, does the amortization schedule restart with every new rate change (ie every year) and would that mean my interest payments will forever be front loaded until the end of the loan period if I don't refinance?

[Bill Gulley]

Other ARMs or short term fixed will likely be your future options. When ARM adjusts it does so for the remaining term, in other words if an adjustment was made in year 5 on a 30 year, it would apply based on the remaing 25 years remaing it is not reamortized at 30 years again. :)