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Posts Tagged ‘ARM reset’

I had an 5 year ARM on a duplex whose fixed interest rate was about to expire.   As I previously written it was a dilemma.  Refinance and increase my already negative cash flow by hundreds of dollars.   There are no investor loans out there for 5.6% (my current rate).   Or try to sell in a down market.  Since my real estate broker said there was investor activity, I listed.  However my listing hit the market literally hours before the Humboldt fire which almost wiped out the town of Paradise.  A last minute wind shift spared most of Paradise but the fledging real estate activity was snuffed out.

So I then spent some time reading through the note trying to understand what would happen in a few months.   It was confusing so I called my lender, WAMU, they had been sending me letters about the reset anyway.

The bad news?  Once the ARM expired,  the interest rate would be recalculated every month. If it had been once a year, I could have taken my chances and re-evaluated the situation next year as the margin would have kept the rate around 6%. Although interest rates are not moving up very quickly right now, in time, inflation will push them up, so a significant risk.

The good news?  They offered me a loan modification.  And get this, I did not have to qualify for it.    The deal was a 7% 5 year fixed rate with interest only payments.  Since my current 5.6% loan was fully amortized, my payments would actually go down by $50.  I took the deal.

Is a good deal?  Well it’s really not a great deal.  I would stop making progress at paying down the principal.  And I would be paying quite a bit more in interest.  So the numbers are not great.  However for my current situation, it was a good enough deal.  Here’s why:

I didn’t have to qualify.  While my FICO is good, my debt to income ratio is not the best and I have more than four properties.  Some of you might not know this, but borrowers with more than four properties are having problems getting any loans at all.   I recently talked to a big time investor that has hundreds of properties.  His financials are pretty good, but no one will give him a loan, he has to pay cash.

5 years of breathing room. The property is essentially break even, and with this deal it will stay break even.  The extra $50 a month cashflow will cover the  loan modification fee in a year.

I keep the HELOC that sits behind this loan. I have a second lien on this property that is a HELOC, there is a balance that would need to be paid off with any refinance or sale.   The property isn’t underwater but in this market paying off the first and second liens when selling would leave very little profit likely to be eaten up by the transaction fees.   Also keeping the HELOC is a nice bonus as it is a possible emergency cash source for me.  It helps me sleep a bit better at night.

Since WAMU is making better money on the increased interest rate, it’s a good deal for them.  And by offering this deal they prevent a possible foreclosure and have a performing loan on their books.  I believe WAMU is yet another lender that has been slammed by foreclosures and the subprime debacle.  So it’s a win win for every one.  I wonder how many banks are adopting this strategy.

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