The debate between getting an adjustable versus a fixed rate mortgage is always a pressing topic in the mortgage world. Both sides of the argument have fair and valid points, about the pros and cons of both mortgage options. On a fixed rate mortgage, your interest rate stays the same, which is great if interest rates go up. However, if interest rates go down, you may want to take advantage of those lower rates without refinancing your whole mortgage. Yet, adjustable rate mortgages have their downsides, particularly in the lack of predictability that comes with them. In the past year, interest rates have steeply risen – so even if you had a low introductory rate, it can be a painful surprise once your rate adjusts.
On an investment property, many individuals opt for an ARM in order to maximize benefit during the introductory interest rate period. That first year in owning an investment property is time that is often spent touching up the home, and finding a good renter (or getting all permits for an STR), and keeping costs low is a priority. Plus, one argument for getting an ARM is that if the rate goes up, and the monthly payment is higher, you can always adjust the rental price in the future.
But, what if your payment rises faster than you can raise rent, or goes above the market value?
This is where a fixed loan option may come in handy. Although that introductory rate may seem enticing, ultimately, there are some major risks that come with ARMs as a long term option. In a market where interest rates are rising, and inflation is high, it can be harder for renters to qualify for raised rental prices – and for short term rentals, fewer individuals are traveling recreationally. Often, families will downsize or relocate, even moving in with family, to combat the rising costs of living. So, if your ARM rate is increasing, odds are, you may have a tougher time finding a renter if you jack up the price. As we’ve seen in the interest rate hike of 2022, these market changes trickle to the whole economy. It is important to consider the effects this can have, for the long term feasibility of your investment.
With a fixed loan option, even if the rate is not as desirable as you’d like it to be, there is the benefit of consistency. If rates do decrease in the future, you may have the opportunity to refinance into a lower rate – taking advantage of any shift that comes in the future. With the fixed option, it can give more peace of mind that you know where your bottom line sits and know it will not fluctuate on a regular basis. On the same hand, if rates do increase, you do not have to worry about scrambling to recoup a loss in an unpredictable market.
If you are already in an adjustable rate mortgage, and are facing any of the above issues, it is also an option to refinance your ARM into a fixed rate option. This may be beneficial if the surge in your monthly payment has been large enough to make it unsustainable. For rental properties, some investors take advantage of hard money loans as temporary financing options to wait out a few years and see what the market does; as the monthly payments can sometimes be cheaper. This is because hard money loans are interest only loans, and have limited documentation required to apply. Credit is also rarely a big factor for hard money loans, so it can be a good option if your credit has taken a hit, with ballooning expenses. Sometimes investors will refinance into a conventional loan as well, for a fixed loan product, if they can qualify with full documentation.
In summary, adjustable rate mortgages have their benefits when getting a low introductory rate matters more than the future monthly payments; and you have an exit strategy in place or can manage if the payments go up significantly. They can also be largely beneficial if rates are on a slow trickle downwards.
However, for a large, continual spike in interest rates, it can be a big financial burden – especially if it was a burden you were not prepared to take on. Refinancing into a fixed rate option, either as a temporary or long term solution, may be worth investigating to compare what your present and future monthly payments would look like.
At Independent Home Finance Inc., we pride ourselves in our decades of industry experience; and specialize in investment property lending. If you are interested in learning about different options, and seeing what different loan programs would look like, give us a call today at the number above. You can also inquire with the quick quote option, for a fast way to get in touch with one of our specialists. Our number one priority is to make sure we help you find a solution that will best fit your needs, no matter how simple or complicated your situation is.