QE2 and Mortgage Rate

[benchmark]

With the QE2 ending soon, will mortgage rate going up soon?

 

I'm buying a house with 1.1M mortgage. I'm debating if I should lock the 30yr fixed rate (5.125%) or go with 5/7 year ARM at (3.5%). The difference in payment is big, but given that eventual rise of the rate (and inflation), I'm wondering if the lower payment today worth the risk of the rate rising quickly soon. A friend strongly suggested to go with 5/1 ARM, saying that the rate won't go up anytime soon, and I can refinance in a year to a fixed rate. What's the board's view?

 

thanks.

[PLynchJr]

I'd also be very interested in others take on this.  Definitely not my area of expertise.  I am building a new home that will be complete around November of this year.  I could get a 270 day rate lock that is about 3/8ths higher than the current 30 year rates.  Problem is the rate cannot float down if rates go lower and I'd have to make a non-refundable 1% deposit.

[Kraven]

This comes down to a pure prediction on the direction and eventual destination of interest rates.  If anyone knew that today, they would be a billionaire in due course.  No one knows, that's the problem.  The predictions on where they will be are all over the map.  That being said, they of course almost certainly will be higher than they are today, but when and how much is open for debate.  One piece of advice is not to do any kind of teaser rate (even if the teaser is 5 years) unless you are certain that whatever it resets to you can handle. 

[benchmark]

This comes down to a pure prediction on the direction and eventual destination of interest rates.  If anyone knew that today, they would be a billionaire in due course.  No one knows, that's the problem.  The predictions on where they will be are all over the map.  That being said, they of course almost certainly will be higher than they are today, but when and how much is open for debate.  One piece of advice is not to do any kind of teaser rate (even if the teaser is 5 years) unless you are certain that whatever it resets to you can handle. 

 

For me, I think it's more of a question of the money we save before the ARM reset vs the amount that we have to pay down to get a reasonable rate. We can handle the reset, but don't want to have to put too much money in real estate/housing, as I think the price is going to be flat to down.

 

Let's say we save $600 a month for 5  years, that's 36k. Now if we have to pay down 300k to get a decent rate  in 5 years (we can handle it), then it might worth it. As I can grow 300k faster that the mortgage rate (5.125%). However, if the rate won't change much for a year, then I can still still refinance to a 30-yr fixed rate in a year and save some money, but it's a bit risky

[Estimated Profit]

In the States do you have the option to split the amounts?

 

50% ARM and 50% fixed?

 

Here in Canada we can do that though our mortgage terms reset every 1-5 years in general.

 

At any rate, if you can split the amounts do that...

[benchmark]

In the States do you have the option to split the amounts?

 

50% ARM and 50% fixed?

 

Here in Canada we can do that though our mortgage terms reset every 1-5 years in general.

 

At any rate, if you can split the amounts do that...

 

Yes, we are looking at a few options:

1) 30yr fixed of 1M mortgage @5.125%

2) 30Yr fixed of 729k @4.5% and remaining LOC at variable rate (current at prime rate + 1% = 4.25%)

3) 5 yr fixed of 729k @3.25% and remaining LOC variable at 4.25%

4) 5 yr fixed of 1M @ 3.875%

we also have 7 or 10 yr variation of 3) and 4).

 

I'm leaning towards 2), though 3) looks very appealing, thus my question to the board.

 

thanks