Self Help

Choosing between a fixed-rate or adjustable-rate loan (ARM) is an important decision in the real estate investment process. Consider the advantages and disadvantages of each mortgage type and decide what’s best for your situation prior to going out to refinance or purchase real estate.

How much risk can you handle in regard to the size of your property’s monthly mortgage payment? If you can take the financial risks that come with an ARM, you have a better chance of saving money and maximizing your property’s cash flow with an adjustable-rate rather than a fixed-rate loan. Your interest rate starts lower and stays lower with an ARM, if the overall level of interest rates stays unchanged. Even if rates go up, they’ll likely come back down over the life of your loan. If you can stick with your ARM for better and for worse, you should come out ahead in the long run.

Adjustable-rate loans (ARMs) make more sense if you borrow less than you’re qualified for. If your income (and applicable investment property cash flow) significantly exceeds your spending, you may feel less anxiety about the fluctuating interest rate on an ARM. If you do choose an adjustable loan, you may feel more financially secure if you have a hefty financial cushion (at least six months’ to as much as a year’s worth of expenses reserved) that you can access if rates go up.

Some people take ARMs when they can’t really afford them. When rates rise, property owners who can’t afford higher payments face a financial crisis. If you don’t have emergency savings that you can tap into to make the higher payments, how can you afford the monthly payments and the other expenses of your property? If you can’t afford the highest-allowed payment on an ARM, don’t take one. You shouldn’t take the chance that the rate may not rise that high — it can, and you could lose the property.

Ask your lender to calculate the highest possible monthly payment that your loan allows. The number that the lender comes up with is the payment that you face if the interest rate on your loan goes to the highest level allowed, or the lifetime cap.

Don’t take an adjustable mortgage because the lower initial interest rate allows you to afford the property that you want to buy (unless you’re absolutely certain that your income and property cash flow will enable you to meet future payment increases). Try setting your sights on a property that you can afford to buy with a fixed-rate mortgage.