10 year arms pros/ cons

[Cody Phillips]

Hey guys just got an offer accepted on a 3 family and current interest rates for conventional loan for investment properties are around 7%, with 25% down. I talked to the company that manages my 401k and they are offering 30year with a 10 year arm at 4.75% with 20% down. My understanding is that this means the first 10 years are at 4.75% and after the 10 years it adjusts to the current rate at that time, you’re also able to refinance at any point. Was also told the max the intrest rate can increase is 5% (so 9.75% worst case senario) Seems like a win win to me also the extra 5% down payment would be and extra almost $20k saved out of pocket.

What’s everyone’s thought on this?

[Chris Seveney]

@Cody Phillips

With 25% down I would do the 10/1 arm all day long at 4.75% vs 7%. While rates are still at historical lows, you are betting that in next ten years the rate will be equal to or lower during that time. I would take that bet everyday.

So what if you were to lose the bet?

With it being income property also remember rents will increase over time while your mortgage payment will not.

I believe we are going to see a lot of people do ARM's in near term- while they are risky, I see greater risk in the 3-5 year ARM with low down payments being where risk lies.