As a real estate investor, you’re always looking for a way to get ahead of the competition. Whatever edge you find can be the difference between purchasing a property and growing your portfolio, or losing out on a deal to another investor. One solution to this problem is acquiring the necessary funds to purchase or refinance a property through a unique rental property financing term option: ARMs.
As the name implies, an adjustable-rate mortgage is a loan with an interest rate that fluctuates. Rate changes aren’t unannounced or sporadic. You’ll be agreeing to some very specific terms regarding when and how your rate can change. An adjustable-rate mortgage (ARM) is far more complicated than a fixed-rate mortgage. Complicated isn’t always bad though. An ARM offers the potential to save money over the life of a loan. Let’s go over what to expect and what you need to know about ARMs.
An adjustable-rate mortgage typically starts off with a very low initial interest rate. This makes ARMs look very attractive when doing rate comparisons against available fixed-rate mortgages. This is because it’s easier for a lender to agree to a term for 5 years rather than for 30. Of course, that low rate isn’t set in stone. The rate rises and falls based on the index that it is connected to.
What period of time does an ARM cover? The 5/1 ARM is the most popular adjustable-rate option. The terms of the 5/1 ARM lock in your signing rate for five years. Your interest rate can change once per year after that. It’s also possible to find 3/1, 7/1 and 10/1 ARMs at Apex Capital Solutions. All of them follow the same general terms as the 5/1 ARM.
The obvious advantage of an adjustable-rate mortgage is that they carry lower interest rates during the fixed period of the loan. Therefore, an ARM may be suitable for investors who want more cash flow flexibility in the near term.
Since the interest rate at the initial fixed period is usually lower than that of a fixed-rate mortgage, you’ll be able to qualify for a bigger loan. Moreover, you can save more money over the short-term because of smaller monthly payments.
If interest rates are falling, a real estate investor can enjoy lower monthly payments without the need to refinance.
It’s really impossible to do an apples-to-apples comparison between a fixed-rate and adjustable-rate mortgage unless you have a crystal ball. That’s because you can’t compare a static percentage rate to a floating percentage rate for a long-term projection. However, we can still get a good baseline comparison for what your loan might look like using an imaginary home purchase.
We already covered that the most common type of adjustable-rate mortgage is the 5/1 ARM. You may have several options for a fixed rate period presented to you if you meet with a lender. Let’s make sure you know what’s involved! Here’s a glance:
We mentioned briefly that ARMs comes as fully amortizing or interest-only loans. Most ARM products are fully amortizing. An interest-only ARM is a product that only requires you to cover monthly interest payments. What’s the catch?
ARMs offers flexible financing to help you do whatever you need to do as an investor, whether that’s purchase a new property, or refinance or cash-out an existing property.
Whether you’re a new investor or continuing to grow your business, competitive interest rates and the level of flexibility offered with ARMs can give you a huge advantage over other investors in your market.
At Apex Capital Solutions we make it easy to finance all of your fix-and-flip projects, rental properties, and multifamily investments. As a national lender, we lend across the country in 41 states including the District of Columbia. Our ARM rental programs are designed to benefit you as an investor and allows you to be set up for success as you grow your rental property portfolio. If you would like to learn more about our ARM options and the benefits that it provides you as an investor, contact us.