Fixed vs. Variable Rate Investment Property Loans
What are some of the main considerations when choosing between Fixed and Variable Rate financing for your investment property? Of course each property is different, as is each borrower’s financial situation, so this checklist is not all-inclusive and should only be taken as a general outline of some of the main topics to be considered when choosing between a fixed and variable rate loan. In this example we’ll examine the general considerations between a 30-year fixed rate loan (ex. Fannie Mae guidelines) and 5-year variable rate loan (ex. Great Midwest Bank guidelines) as it pertains to a two-unit investment property. Rates and guidelines are subject to change and should be checked for accuracy at the time you do your deliberations. Check with me to get all the latest information and/or further guidelines
- 30-Year Fixed Rate Financing
- Rate Protection – Current posted owner-occupied fixed rates offered; fixed for life of loan (30-years)
- Loan-To-Value (LTV) Maximum – 75% maximum for a Limited-Cash Out
refinance; LTV based on a current appraisal done at the request of the bank.
- Points Charged – Add 1% for a 2-unit property, an additional 1.75% for an investment property and an additional minimum of 0.25% for LTVs over 70% (based on a mid-credit score of over 740). Other points could be charged based on the borrowers’ financial requirements (cash-out refinance, existing subordinate financing, etc…)
- Terms – 30-year amortization and note (best used in this example if you plan on holding your property for more than 5-6 years)
- Prepayment Penalty – None
- Reserves Requirement – Borrowers who own investment properties typically will be required to possess liquid reserves in an amount sufficient to cover mortgage payments – including taxes, insurance and association payments – for 2-12 months. The number of months of reserves required will vary based on borrower credit scores and the number of properties financed.
- Title – Must be titled in the name of the individuals who own the property. Titling the property in an LLC is not allowed despite the benefit of limiting personal liability to the individual owners.
- 5-Year Variable Rate Financing
- Rate Protection – Current posted owner-occupied ARM rates offered (see Points*); fixed for 5-years then subject to change according to market rates.
- LTV Maximum – 75% maximum for a Limited-Cash Out refinance; LTV based on a current appraisal done at the request of the bank.
- Points Charged – Add 1% for a 2-unit investment property (subject to specific details regarding the property and borrower(s)). *The 1% might be eligible to be added to rate instead of paying an upfront fee. Additional points based on credit scores, cash out refinancing, subordinate financing, etc… are not required.
- Terms – 30-year amortization/note and 5 year rate lock (best used in this example if you plan on holding your property for less than 5-6 years)
- Prepayment Penalty – 2 months of interest calculated on the outstanding balance
- Reserve Requirements – The number of months reserves required is set by the bank on a case-by-case basis
- Title – May be titled in the name of the individuals who own the property or in an LLC. Allows the individuals who own the property to enjoy the benefit of limiting personal liability through the LLC.