Adjustable Rate Mortgages for Investors
Adjustable-rate mortgages (ARMs) are a type of mortgage in which the interest rate can change over time. This is in contrast to fixed-rate mortgages, where the interest rate remains the same for the life of the loan.
ARMs can be a good option for real estate investors because they can offer lower initial interest rates than fixed-rate mortgages. This can make it easier for investors to qualify for a loan and to purchase investment properties.
However, it is important to understand the risks involved with ARMs before taking one out. The main risk is that the interest rate could increase over time, which could make your monthly mortgage payments more expensive.
In this blog post, we will discuss the pros and cons of ARMs for real estate investing, and we will provide some tips for investors on how to use ARMs effectively.
Pros of ARMs for real estate investing
Lower initial interest rates: ARMs typically offer lower initial interest rates than fixed-rate mortgages. This can make it easier for investors to qualify for a loan and to purchase investment properties.
Flexibility: ARMs can offer more flexibility than fixed-rate mortgages. For example, some ARMs allow borrowers to make interest-only payments for the first few years of the loan. This can be helpful for investors who are cash-flow constrained.
Potential for higher returns: If interest rates remain low, borrowers with ARMs may be able to save money on their monthly mortgage payments. This can lead to higher returns on investment properties.
Cons of ARMs for real estate investing
Risk of rising interest rates: The main risk with ARMs is that the interest rate could increase over time. This could make your monthly mortgage payments more expensive.
Complexity: ARMs can be more complex than fixed-rate mortgages. It is important to understand the terms of your ARM before taking one out.
Prepayment penalties: Some ARMs have prepayment penalties, which means that you may have to pay a fee if you refinance or pay off your loan early.
How to use ARMs effectively for real estate investing
If you are considering using an ARM for real estate investing, there are a few things you should keep in mind:
Understand the terms of your ARM: It is important to understand how your ARM interest rate is calculated and how often it can change. You should also be aware of any prepayment penalties.
Have a plan for rising interest rates: If interest rates rise, your monthly mortgage payments could become more expensive. Make sure you have a plan for how you will afford these higher payments.
Consider your investment goals: If you are planning to hold your investment property for a long period of time, an ARM may not be the best option for you. This is because the interest rate could increase over time, which could make your investment less profitable.
Overall, ARMs can be a good option for real estate investors who are looking to take advantage of lower initial interest rates and flexibility. However, it is important to understand the risks involved before taking one out and to have a plan for rising interest rates.
Here are some additional tips for using ARMs effectively for real estate investing:
Choose an ARM with a long initial fixed-rate period: This will give you more time to plan for rising interest rates.
Make a larger down payment: This will reduce the amount of money you need to borrow and will make your monthly mortgage payments more affordable.
Consider using an ARM on a short-term investment property: If you are planning to hold your investment property for a short period of time, such as five years or less, an ARM may be a good option for you. This is because the interest rate is less likely to increase significantly over a short period of time.
