Option ARM? Other Solutions?
Can someone please explain the Option ARM to me? I am looking to invest in my first rental property (I'm interested in buying and holding properties, not flipping) and the mortgage broker I talked with today suggested an Option ARM. She suggested this for both a refinance on my primary residence (since I will need some of the equity in it to make the down payment for the rental) and for the rental property. She was explaining it to me on the phone, and I thought I understood it, but now I'm not sure that I really do.
I have tried to find some information on the internet, but really haven't found anything that answers all of my questions. I do understand that there are four options each month:
1. Pay the minimum monthly payment
2. Interest only payment
3. Fully amortizing payment
4. 15 year fully amortizing payment
What I don't understand is what exactly the "minimum monthly payment" represents. If I pay the minimum monthly payment, am I paying down any of the principal at all? And if I am not paying down the pricipal, then what is the difference between the minimum monthly payment and the interest only payment?
Also, she gave me an example based on a 112K mortgage at today's rates. She said that at today's rates (1.244 index plus 2.75 margin), the minimum monthly payments for the first year would be $400.11, not including taxes and insurance. What she did not provide me with is what the monthly payment would be if I wanted to pay at the full amortization. Can anyone help me figure out what that payment would be?
I have read that Option ARM are usually best for people who need to maximize the cash flow by keeping their payments low. I'm not quite sure that I fit into this category (I'm just starting in REI, so I do not need the extra cash to put towards investing in another property), so I guess I'm just trying to find out if this is the best option for me.
If anyone has any insights into Option ARM's or any other thoughts on my situation, I would certainly appreciate all the help I can get!
As background information:
FICO 774
Primary residence would probably appraise between 140 - 145K which turns into 42 -47K equity to play with
I'm looking to purchase property (single family home) between 120 - 130K
When the tax refund shows up, I will have nearly 10K cash on hand
I would like to avoid paying PMI on both properties, if possible.
For fun, the broker ran a scenario on a 130K property and suggested 112K 1st mortgage on my house, with an additional 12K second mortgage, both with 5 year Option ARM. She put 20% down on the rental leaving a 104K 5 year Option ARM on the rental.
I apologize for the lengthiness of this post, but I just saw a property this afternoon that I am rather interested in and would possibly like to make an offer on, but I want to make sure I know what I am getting into first!
Any and all help is appreciated!
Thank you!! -Jessi
I'm by no means an expert on loans but if your looking for a long term rental I dont think you want an ARM.
With the equity in your home and also your refund you could go strait mortgage. Low interest rates 10% down would be the way I would be looking at doing things (matter of fact thats just what I did do). 1 year later refinance pull your equity out of your rental buy some more.
With the combined equity and refund you can more than likly buy more than 1.
ED
Option ARMS are to maximize cashflow or buy "more" house.
The minimum payments usually doesn't cover interest and definitely doesn't paydown principle. Any difference between minimum payment and interest due is rolled back into the principle balance.
Also, even though your minimum monthly payment doesn't change for a year, your actual interest can change monthly which will also effect your interest, 15 and 30 year payments each month. Every month you will receive a statement that will show the recalculated interest, 15 and 30 yr payment based on current interest rate for that month and any deferred interest that wasn't paid if paying only minimum payments.
Its a good program if a borrower fully understands it.