There seems to be a new type of program for real estate investors to use when financing rental properties. This “new” program isn’t really that new, in fact it makes an appearance every few years or so then fades again into black. The real estate investingmortgage loan is a 5/5 hybrid loan. Similar to a 5/1 loan, the 5/5 is an adjustable rate mortgage that is fixed for the first five years then adjusts once at the end of those five years and stays fixed for the next five. This is in contrast to a 5/1 loan that is fixed for five years and then changes into a loan that can adjust once per year. The idea is to stay away from the less predictable annual adjustable loan and into a more reliable one. But the idea can backfire.

Let’s say someone takes out a 5/5 loan. Both a 5/5 and 5/1 have lower starting rates compared to a fixed rate loan over the same amortization period, hence the reason for the choice. Borrowers enjoy lower monthly payments and greater monthly cash flow on their rentals. At the end of five years a 5/5 loan adjusts one more time and remains fixed for five more years. The problem is there is no way to tell where rates will be in five years. Indeed, if we were to place a bet it would be for higher rates in five years and not lower. Rates in general have been at or near historic lows for seven or eight years now.

Taking out a 5/5 loan means landlords could find their new mortgage payments much higher and staying that way for the next five. 5/1 loans, and other hybrid terms, are a good choice for real estate investors who plan on selling or otherwise retiring a mortgage on a rental property before the loan makes its initial adjustment. A 5/5 has one adjustment over 10 years while a 5/1 can have five and both provide lower initial rates than a fixed. However, if someone plans on keeping a loan well into 10 years then a fixed rate should probably be the answer. There’s a lot to be said for a little peace of mind as well as planning on an expected cash flow each and every month.