Here is my strategy, today. In the past, I usually sought the 30-year fixed rate mortgage loan for my investment rentals. In 1997, I put one month LIBOR-indexed ARMs on three of my rental properties.

The LIBOR based loans have been excellent performers. even though the rate adjusts every month. I have my payment plan set up to draft whatever amount is needed from my business checking account to make the loan fully amortizing on a 30-year schedule. For nearly a year now, my monthly interest rates have been at the floor for these loans (5.25%, and 4.9%).

Just this past year, I acquired another rental property with a 5/1 treasury indexed ARM (five years fixed, then annual adjustments thereafter). The adjustment cap is 1% per year, 5% over the life of the loan. My plan for this loan, is to use my excess cash flow and make a lump sum payment at the end of each year to reduce my mortgage balance. After six years on this plan, I hope to have this loan paid off and the property will be free and clear.

Last year, my wife and I also refinanced our personal residence from a 6.5%, 30-year fixed rate loan into a 4.5% 5/1 ARM. My thinking on this one is we will enjoy the lower monthly payment for five years. When the first annual interest rate ajustment happens at the end of five years, there is a 1% annual cap. At some point after my sixth anniversary with this loan, I could always refinance (rate and term only) into another 5/1 ARM because the ARM rates always seem to be lower than the 30-year fixed rates. I expect that a refinance at that time will also lower my monthly payment once again, because there will be a lower initial loan balance and I am extending the loan term from 24 years to 30 years.

I have two new rental properties under contract. The first should close in Aug and the second in Nov/Dec. I am looking for LIBOR indexed ARMs for these properties.