HOUSE January/February-2002

In prior articles we have discussed the financing of primary properties and second homes. However, there is a noticeable change in trend based upon prevailing market conditions. The consumer is turning toward real estate for investment purposes.

There are programs which I find better suited for the “investor” buyer which are widely unknown. Recently a client approached me regarding a purchase of investment property located in Manhattan. A prestigious address as well as the new construction feature seemed very attractive, a good choice for investment purposes. The pre-construction purchase price was $1,770,000.00 and the client was looking to finance as much as possible at the best possible interest rate.
Initially, my client expressed an interest in an adjustable rate mortgage in order to procure a preferable rate. Identifying the client’s needs for a flexible portfolio type product, one with lower payments and or payment options, in addition to interest rate stability, I recommended an Index based ARM (adjustable rate mortgage).

What is an Index? There are a variety of commonly used interest rate indices, each of which is an independent, published economic indicator (e.g. LIBOR, COFI, MTA, & CMT). Lenders use indices to establish the interest rate on adjustable rate mortgages, and ARM rates follow the movement of these indices. The lender adds a specified number of percentage points, called a margin, to the index to establish the actual ARM interest rate. Typically, these rates are significantly less than those of fixed rate type mortgages. My client’s margin was 2.35% which, when added to the index of 2.180%, gave him an interest rate of 4.53% on a loan amount of $1,327,500.00. Please keep in mind; this rate will adjust monthly based upon the index at that time. In addition, there are usually life time caps on these loans which vary from lender to lender. Based upon the loan parameters of this lender, the rate would never exceed 9.95%.

The great feature about this loan type for an investor is that there are four payment options. The client can pay the minimum amount due (*not advised, may result in deferred interest), the minimum amount due plus interest owing for the current month (interest only), full principal and interest to amortize the loan fully within the original term, or principal and interest in an amount that would fully amortize the loan over an initial 15 year term. Depending upon vacancy or a tax advisor’s recommendation, the client has choices.

Other attractive aspects of this program include: the availability of a 40 year term; assumability, subject to fees and conditions; low documentation requirement for income; extended rate lock options with loan amounts up to $2,500,000.00.

For comment and questions I can be reached at (516)935-5600 extension 13.

Back