Prelude
My wife and I met with my mortgage broker to discuss refinance options on House #1. It turned out to also be an education in the pitfalls of procrastination.
First, the main reason for the meeting was to discuss our financing options from this point with House #1. Right off the bat, my broker asked us what are plans were for the house. I told him we currently have it on both te retail and lease market. If it sold to a retail buyer, we'd be happy, and if we got a renter in the place, we'd be equally happy. He listened to our response, and then asked us again what we wanted to do with the house, but he also inquired as to what we wanted to do period. My wife and I looked at each other, and I told him that my plans were to acquire several SFR's, eventually get some duplexes/4-plexes, and then move up to small apartments and/or more multi-family investments. Then came something I've known about, but needed to hear from someone firsthand ...
He said that he could tell we had no plan in place for this property, and that if we decided to go forward with my vision, the first thing we would need to do is write a business plan.
He said this was something you just couldn't do without a plan. If we tried to do it halfway, we would fail. And if we continued without a plan, we might as well stop right now. I won't say this came as a shock to me as I've heard this from just about everyone I've met in this industry, except it really hit home the way he said it. We then spent the next hour talking about the subject in detail. After that, he then asked us what we wanted to do with the house. At this point, I told him that I would like to hold on to it as a long-term asset, which he then started to discuss our financing options.
Financing
I'm not a big fan of the new financing models that are out there. I've always been accuustomed to the regular 30yr, 15yr, ARMs, etc. I'm not too savvy when it comes to some of the more nontraditional financing methods nor am I "hip" on the idea of financing that takes money out of an asset each month. However, my curiosity piqued at the idea of what is commonly called a "pay option ARM". I don't like the idea of making a payment that not only adds nothing to the principal of a loan, but actually increases the payoff, but the pay-option ARM does give the holder the OPTION to do this. The holder can also make an interest-only (IO) payment if they wish, or make a full interest+principal payment. That's why it's called a pay-option ARM. Of course with any luxuary there comes a price. The pay-option ARM is adjusted on a monthly basis. The rate is directly affected by the MTA (or 12 Month Treasury Average). I won't go into the details, but a Google search for "+MTA +treasury" will yeild some hits. Even paying the P&I for the new loan, it would bring my payments down almost $200/mo. today, which would cover PM and maintenance AND allow me to reduce the rent value (if I wanted).
I'll explain why I chose this route more in a later blog entry as I will have to go more in detail of my particular situation.
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2 comments:
Yes, it's a variable-rate loan (varies monthly). However, it uses an average of a trailing 12 month average, so it won't fluctuate too much too quickly. Based on the last 10yr history, I should be okay in the short term, unless rates get as bad as they did in the early 1980's. I'll try to write an in-depth post about it, using hard numbers. While I seriously doubt I'll ever use the negative amortization or interest-only "options" of the ARM, it's good to know they are available in case I need to use them for some reason.
Here's a good explanation of MTA's.
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