When I bought my townhomes in SLC, I opted for an option ARM on Townhome #2. I guess I wanted to see how this would work out. The difference at that time was:
5/1 ARM at 6.5%
Option ARM at 1.375% for 3 months and then 1yr MTA + 2.95% (which was 5.75% at the time)
I decided to take the risk and go with the Option ARM. My first 3 months of lowe 1.375$ payments are done and I am faced with my first option payment.
$491 – Minimum payment and Negative amortization
$686 – Interest only
$800 – Principal and interest based on 30 year amortization
$1089 – Principal and interest based on 15 year amortization
Remember, the above numbers include a $97 tax escrow. The interest only payment corresponds to a 6.125% interest rate. So, I’m still ahead of the 6.5%, 5/1 ARM which I could have picked. I will make the interest only payment every month that it is rented. However, it is nice to have the option of paying only $491/mo when the unit is empty.
So new numbers for townhome #2
Purchase price – $141,000
Closing costs – $4,000
Total price – $145,000
Loans – 20% @ 6.5% IO = $157.00
80% @ 6.125% IO = $589.00
Taxes – $95.00
HOA – $97.00
Insurance – $10.00
PM – $80.00
Total monthly expenses = $1,028.00
Cashflow = -$63.00/month
BTW, if I decide to pay the negative amortization payment, my cashflow would be +$132.00/month. However, my mortgage balance would be increasing by $195/mo. So I’m not really making any money. Bottom line is that I’m still -$63.00/month on this property, the difference is where is the money located, in my pocket or in the mortgage balance.