2008 did not define the Arm loan
Ok, let’s rip the bandaid off right now. The Arm is not a bad word. Back in 2008 there were too many of these loans given out to investors who either should not have qualified OR who did not fully understand the terms. We as an industry have evolved, and you, as an investor are savvier than ever. So, now that that’s out of the way. Here’s how to use it.
An ARM is a type of adjustable rate mortgage loan with a fixed interest rate for the first five years (or 3, 7 or 10).. It’s a great option for investors, flips, and calculated risk-takers. After the initial five-year period, the loan switches to an adjustable rate for the remainder of the term. At this point, you can evaluate your options: let it ride, pay it off or refinance.
I recently had a client that was purchasing a “move up” home. They had a large down payment but the loan amount was still around the conforming loan limit. We looked at a fixed rate conforming versus a portfolio arm and the difference in APR was right around 1%. They selected a 5/1 ARM and saved a bunch of money every month.
Now- this was a calculated investment. They are under the impression rates will be lower in the next few years so they aren’t worried about the 5 year fixed period. No one knows for sure rates will be in 5 years. However, if the rates are lower, the ARM is a home run. If you’re interested in this type of option, call me and I’ll walk you through the steps or you can always visit this calculator on Mortgages.org https://www.mortgagecalculator.org/calcs/5-1-arm.php
Using Your home to leverage your next moves
Sometimes, a little liquid cash can make all the difference. Many wealthy people of the world all speak to leveraging the assets you have to build and create your own wealth. A HELOC can help you do just that.
“A home equity line of credit, or HELOC, is a revolving type of secured loan in which the lender agrees to lend a maximum amount within an agreed upon period where the collateral is the borrower’s property.”
Some people use it to get out of debt, or improve the interest rates they have, some use it step up their investment portfolio, or to make improvements and build value into the home they have.
One client of mine consolidated their student loans, car payments and credit cards using a HELOC. I helped them purchase the house last year so they had 3% on their first mortgage so a traditional cash out refinance didn’t make sense for them. Much of the debt they paid off was variable and their accountant said they would be able to write off the HELOC but not their current debt. (not tax advise that’s what their accountant said- please check with your tax professional).
What if you Don’t Make it on Paper?
Here’s a perfect story for those in the entrepreneurial set. – I was recently able to help a musician with a 10% down bank statement loan. The way he was paid didn’t all show up on the tax returns.
He worked internationally and a lot of his payments were received through Zelle and Venmo.
We were able to approve a Bank Statement Loan for him. We typically take the sum of the deposits on the bank statements for someone self-employed and multiply them by an expense ratio.
We use a standard 50% for the expense ratio. If it’s a capital-intensive business we may require an expense ratio of 70%. Sometimes, we can go lower to a minimum of 25% if we have a letter from the CPA confirming the expenses didn’t go over this amount.
A great explanation about how this calculation works is on this Youtube video.. Maybe I’ll do my own here in a bit… https://www.youtube.com/watch?v=v13iK9CvYFA.
The Easy Investor
The Debt service coverage ratio is a key measure of a company's ability to repay its loans, take on new financing and make the appropriate payments. It’s a calculation and loan product measuring the debt capacity and debt to equity a company can shoulder. So think of it as operating income vs the debt.
This can be great for investors and llc housing organizations. For example, I recently was doing a pre-approval for an investor with 10 plus properties.
The ease of this loan really appealed to her. If you have ever tried to get a loan with complex tax returns you know you can be put through the proverbial “Wringer”.
With this loan, the borrower’s income is not even considered. It functions more like a commercial loan. Generally, if the potential rents (as determined by a rental survey) are equal to or exceed the housing expense (generally PITI + HOA) then it works.
Most investors look for at least a 100% coverage ratio. Some will go as low as 75% and some will require higher for first time investors.
If you want to look into more alternative funding options or if any of these appeal to you, reach out!
Cheers,
Andrew
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