I use an adjustable rate mortgage (ARM) for a number of reasons on my rental properties. I can get more than four loans on a property with ARMs, the rates are lower and at one point I used to pay off my mortgages quickly. I have since changed my strategy however, and I no longer do this. The key to obtaining a lot of properties and a lot of cash flow is being able to purchase and finance many rental properties. I have purchased 16 rental properties and financed every one of them with a relatively low-interest loan. I am currently making over 15 percent cash on cash return on my rental properties and you can see how I do it in my complete guide to investing in long-term rentals.
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For more information on financing long-term rental properties, fix and flips or owner occupant homes, check out my eBook: How to Finance Multiple Rental Properties. The book explains how to get loans for multiple rentals, for fix and flips or for an owner occupied home. The book is available at Amazon or in PDF format.
What is an Adjustable Rate Mortgage (ARM)?
Adjustable rate mortgages or ARMs have gotten a bad name the last few years, but they are the perfect loan for me. An ARM is a loan that starts with a low-interest rate, but the interest rate can increase after a set period of time. A 5/30 year ARM is a 30 year loan with an initial rate that is fixed for the first five years, but can increase on the sixth year. There is a cap for how much an interest rate can increase after the adjustment period and a minimum it can decrease. An ARM can adjust up or down depending on what interest rates do.
Adjustable rate mortgages have lower interest rates than fixed mortgages
ARMs have very low-interest rates locked in for a guaranteed time period. I like 5 year ARMs because of the low interest rates. ARMs can have rates that are 1 percent or less than a 30 year fixed rate loan. If you heard horror stories about ARMs in the past, there were some people who used them carelessly. You used to be able to get 6 month or one year ARMs with very low rates that would then jump to very high rates. Many times buyers could not qualify for the normal 30 year fixed rate loan, but they could qualify for the lower payment the ARM offered. I would not suggest using an ARM because you cannot qualify for a 30 year fixed rate mortgage. If things are that tight, reconsider your finances and plan!
An adjustable rate mortgage may be your only choice to finance multiple properties
Another reason I use an adjustable rate mortgage is they are one of the few options available from my local lender. I use a portfolio lender who lends their own money on loans; they do not sell their loans to investors. My portfolio lender offers a 5 year and 7 year ARM as well as a 15 year fixed loan. The 5/30 year ARM has the lowest payment, lowest interest rate and works perfect for my cash flow strategy. The reason I use a portfolio lender is many lenders will not loan to investors when they have more than four mortgages. My portfolio lender will lend on as many loans as I can qualify for, but I have to use their limited loan options. Here is a great article on other ways to get financing when you have more than four mortgages in your name.
Are ARMs riskier than a fixed rate loan?
ARM have gotten a bad name the last decade due to the high number of loans that were foreclosed on during the housing crisis. The reason so many people lost their homes with an ARM was they qualified on the low initial interest rate of an adjustable rate mortgage. When the rate on the adjustable rate mortgage went up after five, three or even one year, the home owner could no longer afford the higher mortgage payment. If you are thinking of getting an adjustable rate mortgage, make sure you can afford the payment increases even if you think you will have the loan paid off by then. Do not depend on being able to refinance to get yourself out of the loan. Buy properties below market value, and this will allow you to sell the home as well.
An adjustable rate mortgage may be cheaper than a fixed rate loan
We know the interest rate on an ARM is lower in the beginning than a fixed rate loan, but the ARM may be cheaper than a fixed rate loan even if you do not pay off the ARM right away. During the five years that the ARM is at its low rate, you are saving money every month over the fixed rate loan. Even if you don’t pay off that ARM and the rate adjusts, it would still take years for the total cost of the ARM to catch up to the fixed rate loan. If you reinvest the money you are saving from the ARM and make a higher return on that investment than the interest rate on the loans that will make you even more money.
An Adjustable rate mortgage is a great loan, especially when have few other options. Be smart when deciding to use an ARM and it can be a great tool for any investor. The biggest mistake you can make is not being prepared for a payment increase if you are not able to pay off the loan or refinance. If you are prepared to hold the loan, you should be just fine.