i said what i said to accentuate the extremeness of U.S. mortgage buyer behaviour. a hedge is still a bet. calling it a hedge doesn’t make it any more prudent of an activity. i could say that taking out a 5-year ARM over a 30-yr fixed mortgage is a hedge against the risk associated with having no interest rate exposure. terrible usage of the word but appropriate.
Yes. It’s generally viewed as poor financial planning to take floating rate martgages, similar to payday lenders, credit cards, etc. Plus, people are happy with the current low rates so why roll the dice to see if they are even lower in 5 years? Back of the envelop calc for me has the fixed being a winner in the event that rates are over ~4% percent in 5 years without too much loss if they remain the same or are lower (about 3-4% of the mortgage balance).
Also depends on how long you are going to stay in the house. It gets a little tricky choosing fixed over ARMs at the 10 year point
there is certainly some criticism of those who take variable rate mortgages in Canada but the same goes for the other side. if you take a 10 year fixed rate, you’re an even crazier person than the variable rate guy.
as for the “without too much loss” comment, the difference between a 5-yr ARM and a 30-yr fixed using your rate difference (1%) would result in $30,000 in extra interest over five years for my mortgage. i would say that’s material. also, when you say “rates are over ~4% in 5 years” what rate are you referring to? the 5 year UST rate? if so, based on current rate expectations, this would take a massive, i mean massive shift in U.S. growth, inflation and interest rate expectations. basically a full normalization to the pre-2008 days. within 5 years of first hike and while Japan, Europe and nearly half the world are set to be in zero or negative rate territory. seems unlikely.
are U.S. mortgages generally portable and blendable?
This is one of the more intellectual things you’ve said on AF. Haha. Good to know there is an actual analyst behind that handle of yours.
Portable? No.
Blendable? I don’t know what you mean.
portable is you can move your mortgage to another house. blendable is you can move it to another house and add more mortgage on top of it at a blended rate.
if U.S. mortgages are not portable, why do you lock yourselves into 15 or 30 year terms? this just keeps getting crazier. so americans are locking in excessively long terms so that they almost always pay more over time AND incur fees when they have to break the unnecessarily long mortgages?
dont most ppl take out 30 year mortgages and repay in 15 years?
basically its a 15 year mortgage but if you run into hardships you go back to paying the lower (30 year) amount
you could always go 5-yr or 10-yr ARM with a 30 yr amortization and save on interest costs along the way.
“rates are over ~4% in 5 years” - 30-year mortgage loan although to be fair I gues it should be a 25-year loan but I’m not sure it exists. Also, the spread I’ve seen is about 60 bps not a full point.
the issue with looking at it like this is that almost nobody goes the full 30 years because of more discretionary income as we age and substantial natural wage inflation. like igor pointed out, it makes the most sense to look at the 10 year rate, but really, once you go 5 years, you’re going to keep going 5 years until you’re done to keep your interest rates as low as possible.
Are you hedging your nominal or real costs though? If short rates are at 5%, you’re likely getting juicy pay raises. Salaries are a hedge to higher rates.
What’s crazy about doing that? For most of us this our primary residence we’re talking about, not something in a portfolio to get excess return out of. The 30yr rate I have on my mortgage is 3.75%, and that’s pretax. I don’t want to be screwing around with ARMs when interest rates are likely to rise. The cost of staying in my house will rise enough over time between increases in property tax and insurance.
it’s crazy because the futures curve is saying inflation will remain between 1%-2% forever and therefore the five year yield will take forever to rise to rise the necessary 200% to make ARMs a worse deal.
this is why i started the thread. why do americans as a massive group uniquely take out unnecessarily long and expensive mortgages but at the same time have similar takes as Canadians on energy price hedging, life insurance, auto/home insurance, warranty insurance, etc. based on your argument for choosing a 30 yr mortgage, you should be locking in your home energy prices for 30 years too. and you should be all driving electric cars to reduce gas price volatility over time. my point is that the way americans see fixing the rate on their mortgages is unique and counter to how they see other fixing schemes. there has to be some distinct reason why americans are illogical in this way.
americans dont like to take on interest rate risk wtih their mortgages, i guess not everyone is good at predicting shifts in IR as candians?
btw whats the margin on ARM loans these days
I have a 30-yr fixed rate mortgage at 3.50% – and I don’t feel that I made the wrong choice.
that’s the thing. it’s not about predicting rates. you’re going to win with the ARM 90% of the time. statistically tested over all time periods. as you’re so inclined to win with an ARM, it is gamble to fix the rate and go for the 10% chance of winning an unknown but potentially much larger prize. but americans seem to think this aggressive gamble is actually a hedge.
and if rates are 5% and you lost your job at wal mart?
Call it illogical if you want, maybe it is, I haven’t run any numbers but I think it’s just because it’s what’s typical in the market place. If the normal mortgage products in Canada were 15 yr and 30 yr fixed rate and not the 5/7 ARMs, most people would probably have 15/30 year fixed rates by default.