Some real estate investors are not buy and hold owners but rather seek to capitalize on depressed prices in markets they believe will rebound. In such cases, it may not make a ton of sense to take out a long term fixed rate mortgage product such as a 30 year home loan or 20 year mortgage. We asked Brian Mitchell, a branch manager with Gateway Bank Mortgage, in Wilmington, North Carolina for his thoughts?
Q: Should I consider a 5 year ARM or a 7 Year ARM for an investment property?
A: It really depends. With most mortgage providers who are selling Fannie Mae and Freddie Mac agency products, there is a 1.5%-2% hit on a mortgage company's rate sheet for the home being a rental property. The issue becomes whether or not it makes sense to pay the points out of pocket to get the lower rate and how many months and/or years it will take in monthly savings to recoup that upfront investment. If the point costs you $2,000 but you end up saving $75 a month in principal and interest payments, it will take you close to 27 months to break even. So, if you are planning on holding the property for more than 27 months, you could likely come out ahead. Of course, you are also taking on more risk with a adjustable rate product. Be sure to try to put yourself in a position to refinance to a fixed rate loan when and if the need arises.
Thanks you Brian for your input. If you are looking to purchase or refinance a North Carolina mortgage or Virginia mortgage, be sure to give Brian a call at 910-796-7141.
