First-Time Investor: House Hacking with a 5/1 ARM?

Question

Hey All!

I'm planning to purchase my first SFH and do a house hack at the end of this year to get into the REI game! A local lender has a first-time homebuyer program that offers 0% down with no PMI and $2k towards closing costs with a very competitive rate (6.025% as of 8/19/24). The only thing is that it's an ARM which I hadn't initially considered for my first property. The really attractive part of the loan is the idea of not having to put down cash as a downpayment (even though I do have cash available since I was initially anticipating going with a Conventional 30-year loan).

Is it fine to assume the risk of interest rates going up for the sake of putting 0% down? I'm thinking of cash-on-cash ROI here in the long term (I'm in a medium-appreciation environment which helps). The assumption is that I would re-fi to a conventional loan when (if) rates drop in the next 5 years. What things would you consider in my situation? I won't be cashflowing either way (whether I put 0 or 20% down) because of the market conditions, so that's not really what I'm going for (although it would be nice). This lender has NO PMI for any of their mortgage products so PMI for under 80% LTV isn't something I have to think about thankfully.

I'm conflicted because saving a lot of my cash that I had anticipated using for a downpayment could be great to use for my next property in a year (or later). If the interest rate environment is horrible in 5 years, I could also just sell the home if worse comes to worse since the anticipated appreciation will give me some decent equity by that point even though I would start at 0%.

Any advice would be very much appreciated. Has anyone done something similar in the past? Remember, this will be my first-ever home purchase. Thanks!

Jerell Edmonds · Answer

This is amazing good for you man! I might have try to something like this for my next investment

Wale Lawal · Answer

@Dillan Gomez

The 0% Down Adjustable-Rate Mortgage (ARM) is a useful tool for preserving cash for real estate investments, but it comes with risks like interest rate uncertainty and dependence on market conditions. Comparing it to a 30-Year Loan is crucial, as it preserves capital but also takes on rate hikes. To make the best decision, consider risk tolerance, market timing, future investment plans, and exit strategy, and consult a financial advisor.

Good luck!

Benjamin Carver · Answer

Personally I'd feel comfortable with a 5-1 ARM. 5 years is a long time to refinance or sell - preferably the former.

Bryan Maddex · Answer

There is never one way to invest and never a "best program"", only what is Best for your situation. My goal for clients is to bring additional information to light to let you think thru your options! If you cannot qualify for HomeReady, SECU is a fine option and as i said before, rates should be headed down and you should have plenty of time to refi into a 30 year fixed rate so long as you are able/willing to stay in the home for an additional 12 months after the refi. You can always refi as investment property in the future and then you are not limited to the 12 month occupancy rule, but investment rates are usually higher than owner occupied rates, so just need to re-evaluate your plans once you start considering your refi options.

Dillan Gomez · Answer

Thanks for bringing this to my attention, Brian! I wasn't aware that you have to live in the home for 12 months after a refi, but now that you mention it, it does make me think through my investment strategy.

Even so, the option to do less than 20% down with no PMI, plus up to $2k (free money) for closing costs with this mortgage product is pretty hard to beat. My income is too high for income-based home-buyer programs.

At the end of the day, I will refi either way (whether I do ARM or fixed now) because I want to capitalize on the best rates when they drop, so it doesn't change much - either way, it seems like I'll have to live in the home for 12 months whether I do an ARM or a conventional loan now. Now it's just about bringing as little money to close as possible and cutting my monthly payments down, which this loan product does well on a level I haven't seen elsewhere!

Think about it, if the numbers work and you were able to bring 0% down to a $350k house and only have to pay around 8k in closing costs with no PMI, wouldn't you do it? That's free money! I still don't see many downsides to this mortgage product!

And I haven't seen anywhere with rates under 6% without a points buy-down. SECU has the best rates I've seen with no points buy-downs. I'm sure after the Sept and subsequent rate cuts we will see a few lenders get down to the high 5% with no buy-downs, but even still, it's hard to beat up to 0% down (no PMI mind you), with low rates and 2k towards closing costs, regardless of the loan type since I'm going to refi in 5 years anyway (whether I do conventional or ARM).

Thanks for your thought-provoking comments, Brian! :) A lot of this is thinking out loud for me!

Masyn Grant Barney · Answer

I think it is a great product! I wouldn't go less than 5 years on an ARM personally but 5 years with those terms sounds awesome!

Here in Utah we have a local credit union (can do loans in 10-15 states though) that has a similar loan. $0 down first time home buyer loan, no PMI, 40 year loan (lowers your payment even more), and get this, NO INCOME CAP! Crazy I know. Only downside IMO which isn't bad at all is that it has a balloon at 15 years. Slightly above market rate, and you can't buy the rate down. But I absolutely love the loan.

Enjoy the awesome loan product man!

Russell Brazil · Answer

You got 5 years to refinance. Thats plenty of time to kick that can down the road. Just make sure if the opportunity presents itself, if rates go down to 5% or lower, jump on it.

Mike Scaccia · Answer

I love it man! I'd say take the ARM- plenty of time to watch the market, and we already seeing rates trending down. Revisions to the most recent jobs data shows us that they were off by almost 1,000,000 new jobs being created which tells me the job market isn't as strong as we are led to believe which means were closer to a recession, lower inflation and subsequent rate cuts from the FED. If rates fall off a cliff in the next six months you refi into a 30yr fixed and there is your fixed rate!

Mike Scaccia · Answer

Dillian,

First off congrats on your journey into real estate, and no better way to get started than a house hack. Little back story on me, i am a local lender in Chicago, been the biz almost a decade. Investor and house hacker myself.

The deal you're being offered from what i can tell seems like a steal.. 0% down no PMI? Who is this through and what market are you in if you don't mind me asking!? Is this not a conventional loan? What is the type of financing and is there any points of fee's associated with the rate being offered? From my perspective, if you can get a 5/1 ARM at a lower rate, by all means take it. Most expect rates to come down over the next 24 months, and since a 5/1 ARM is fixed for the first 5 years, you'll have plenty of time to get out of that ARM prior to it adjusting.

Right now, i'd say leverage is your friend, rates expected to come down, which will only drive demand therefore increasing home prices.. CASH IS KING. Hang onto your money if the payment makes sense without a large chunk down, or any for that matter. So long as you plan to hold the asset for the next 5-7 years, the historical appreciation/principal paydown should be enough to cover costs of sale, should you need to exit. Putting less money into the property upfront would give you a greater return on your money because you're into for basically nothing out of pocket upfront!

If you have any other questions feel free to shoot me a PM/DM!

Thanks,

Bryan Maddex · Answer

Hey Dillan!One thing to consider that I did not see mentioned by anyone is your plans on living in the property. An ARM product can be a great way to save now, but if you are not planning on living in the property beyond 1 or 2 years, it may not be ideal.

When you refinance a property as an owner occupied property, you are signing a new 12 month occupancy clause which means you need to live in the home as your primary residence for 12 months after you do the refi.

Rates are on a downward trend and likely will continue to do so for the next 12 months so you may have time to refinance your loan in the next year or two into a fixed rate while you are still living in the property so if you planned on living in the home for 3 years, you could wait 2 years for rates to drop and then refi as owner occupied into a new 30 year fixed rate.

Alternatively, you could get into a fixed rate now at at 5.875% on a 30 year fixed rate if you qualify for the "HomeReady" program (HomeReady is an income limited program that gives buyers a fantastic rate). There is PMI when doing this program, but many times it is discounted as a part of HomeReady. To really know options, we would need to look at your income, area you are purchasing, and credit score. SECU is easier to qualify for with lower scores, but comes with a 1% origination fee. If I charged you a 1% origination fee, you could do a 30 year fixed mortgage with only 3% down at rates as low as 5.5% today! These rates could be better after Sept 18th when the Fed starts to cut rates.

PMI can be dropped once you have made 2 years worth of payments and your home has appreciated to give you 20% equity. Homes have been appreciating in most parts of NC at about 8% for the last 2 years, you could potentially drop your PMI in 2.5 years or so if appreciation continues at the same pace. Doing quick math, lets say you are purchasing a home for $200k. 1% origination fee is $2000. PMI could be in the $80-$100/month range if you have fairly good credit so lets use $90/month. You could pay PMI for 21 months before the PMI cost more than the origination fee so you may not be paying much of a premium on PMI vs the origination fee charged by SECU.

If you get this house up and running, you could be looking to purchase your 2nd home in just over a year with 3 to 5% down (depending on your income and the income limits for HomeReady once you are looking to purchase your 2nd property). 5% is always allowed if you make more than the HomeReady income limit.

Rates should be on the decline for the next few years, 5 years out is way too far to know if we will still have rates as low as they may get, or if they could potentially be higher than they are now. Keep in mind that 2022 we saw rates go from 3% to 8% in about 1.5 years! 5 years is a lot of time for markets to shift and shift again.

I am in NC if you would like to talk more about 30 year fixed rate options and see if you qualify for HomeReady and rates under 6% as of today!

First-Time Investor: House Hacking with a 5/1 ARM?

First-Time Investor: House Hacking with a 5/1 ARM?

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