If one is investing in real estate and has decided to use an adjustable-rate mortgage (ARM throughout the rest of the article), then they must be positive that they are well-prepared to push aside the lender's antics and evaluate the different loans using their own knowledge and information. In the list below, five vital tips for evaluating an ARM are mentioned along with a brief explanation of each. This is the final part belonging to a three-part series about ARM shopping tips, so if one missed the first two parts, they may want to go back and check them out.
1.) Fees - Almost all loans have fees. Make sure that the lender discloses all the fees, including application, credit report, appraisal, inspection, processing, and any other fees that they make stack on the plate. Not to be pessimistic towards the finance community, but they are often great at disguising fees until the borrower is writing out their check and nearly collapses from heart failure. We don't want that, so protect yourself.
2.) The Down Payment - There are ways around the down payment on a loan. Paying PMI, having excellent credit, using a mortgage broker, being a first-time home buyer, and the best of all the fancy two-mortgage trick (that's a whole other article) are feasible methods, but for those that are simply putting a down payment on the loan, make sure you know what it is. Most lenders require the basic 20% down, and the less one puts down on the loan the higher the interest rate and points, if any, will be.
3.) Loan Amount - As a borrower, don't waste the time analyzing a loan just to realize the loan's required amount is too small or too large. This doesn't sound like much, but let me break into first-person to explain. I once had the specifics nailed down and perfected for the purchasing of a nice single family rental property. The one factor that I didn't figure into my calculations was the minimum required loan amount of the lender. Long story short, the minimum was well below the price I was going to pay for the property, and I walked away from it. (I still think about that property sometimes, I wonder if it thinks about me?). Be aware and save yourself the let down that I didn't.
4.) Loan Term - This is straight forward and to the point; almost. Loans are almost always of 30 and 15 years in length. But, as I briefly described earlier, there is a trick to buying property using two mortgages. When this occurs, often one will use both a 30 year AND a 15 year loan. Regardless of the borrower's plans, it is an intelligent idea to check their budget and see which loan term best fits their financial goals.
5.) Early Payoff Penalties - It is often recommended that a loan NOT have a prepayment penalty; a penalty for paying off the entire loan early. Useful especially to real estate investors who don't want to be tied to a property for the next 15 to 30 years and business professionals who are often relocated due to their business, payoff penalties are best to be avoided. One never knows what life has in-store for them around the corner, but knowing that it's not a prepayment penalty will help them sleep at night.
Remember, ARMs can be a great investment tool, but the borrower should always be well-prepared and able to breakdown the loan's attributes without relying completely on the often-times self-beneficial advice of the lender. That concludes the three part series on shopping for ARMs. Remember, knowledge is power!
The author is the founder and owner of both ManageYourRentals.com and LandLordDocuments.com.