that is very interesting to me. if you ever write a white paper in this id love to read it
I’m in the process of buying another home and we’re trying to not sell our current home or our rental property, so we’ve been looking at a ton of options lately. For a straight purchase, I’m getting quoted 3.125 on a 15 year fixed. The same bank is advertising 3.5 on a 7/1 ARM. My former employer is the bank that holds both of my current mortgages. 15 year fixed at 3.10, 5/1 ARM at 2.875. I know I’m in the minority of American’s that buys houses on 15 year terms, but the premium I’m paying for rate certainty seems worth it to me. That said, once we get our new place figured out, I’m going to extend the terms on the rental properties to as long as the bank will let me. If I can get my grandchildren’s grandchildren to have to pay on these things, I’ll sign up for a 150 year loan right now.
this was my initial thought. that the banks just don’t advertise anything but the 15 and 30. my question is why hasn’t a competitor come to dominate the mortgage market by convincing people of something so obvious, like a 90% chance of saving money and lower payments now and on average over the life of the loan? i’m trying to understand the american mortgage shopping mentality and why an ARM is not the default as it is in commonwealth countries. it’s like the tradition of a 15 and 30 year mortgage is costing the american people a couple hundred billion in interest per year.
Since we are sharing, I paid cash in 2010. Took out a mortgage in 2012. Couldn’t resist the cheap ARM rates. No points and signed the papers at a coffee shop of my choice two blocks away. Now that’s service. Money in my account next day. If interest rates ever takeoff, I’ll just pay it off. A fixed would have cost me tens of thousands of dollars so far. Like you, I “feel” good about my decision.
a spread of 22.5 bps is ridiculously good. if that was everyone’s choice i could see why people go for a 15 year fixed. is this normal? why such a tight spread? what would a 30 year cost you?
ARMs you are having to pay closing costs now. I know a few years back they were pushing no closing costs on these things but not anymore
It’s not normal as far as I can tell, and I have no idea why their advertised spread is so low. I’ve always done 15 year fixed because I don’t ever want to overextend myself on housing. The interest savings between 15 and 30 is usually north of 50 points when I’ve looked, so I never felt a need to investigate ARMs. ARMs also were where most of the shit product lived in the mid 00s, so I think there are a lot of people who shy away from them, and even some lenders who aren’t crazy about steering customers to them. All anecdotal of course.
I’m not sure “most” people do it that way, but that’s essentailly what I do. 30 year term and make one additional payment a year toward principle and it cuts it down to ~18 years.
Another thing that’s not being addressed is the history of mortgage rates. Either you’re old enough to know first hand, or you heard it from your parents…mortgage rates in 1980 were nearly 20%. That’s fucking insane. Quibbling over 4.25% vs 3.75% does matter, obviously, but in the grand scheme of things, we’re all just happy we don’t have to deal with double-digit mortgage rates. Locking in a rate to guarantee I’ll never see north of 5% (or 4% for that matter) is just fine. I don’t really care if I can save money over the short-term by using an ARM.
/\ Your post sounds a lot different if real rates, instead of nominal, are inserted.
it’s funny, as much as i think ARMs are better, i would like to actually have a choice, especially one that is as attractive as 2xTM’s. in canada, you can go variable at 2%, 5-yr fixed at 2.3%, 10-yr fixed at 3.7% or 25-yr at 8.7%. for us, going long-term is 10 years. we’re kind of forced into the 5-yr even though i do believe that is the best option for most people. variable/floating is likely to win over the long-term but people don’t like their payment changing on a month-by-month basis.
3.35 here
The answer as to why an AFer would fix a rate for 30 years today is - we have wives. If I advised we take out an ARM and it goes bad, that big fucking “I told you so” from the wife would be worth $30k to get out of.
^
this. I was pushing really really hard for a 5 year ARM but wifey wouldn’t budge
Why are the rates so much higher in Canada (25 yr @ 8.7% vs. 30 yr in US <4%)?
I’m going to have to ask you to cite your source. That doesn’t pass the smell test and even if that statement is correct, my guess is it’s out of context, meaning there are probably other considerations like refinancing that must normally occur to “win.”
Edit: I will say, being in a 30+ year period of declining rates has certainly helped ARMs though. But, even if your statement is correct, it wouldn’t be in a rising rate environment.
Past performance is no guarantee of future results. For Institutional Use Only.
i won’t easily be able to find a source but that is the actual approximate win rate of variable rate over a 5-year fixed so i can only assume the win rate i higher for a 5-yr ARM versus 30-yr fixed. this win rate is definitely a by-product of the fact we were in a 30-year bear market for interest rates and rates are lower now than ever which makes it obvious why floating, or short-fixed is better than long-fixed. clearly, if rates spike 400%, which happened that one time ever, you’re screwed, but if they don’t like 99% of the time, you’re going to most likely do better with variable. obviously spreads matter too. if everyone had 2xTM’s choice, they would go long and fixed as the premium is negligible. even if the odds of 2xTM’s situation is 50/50, the higher probabilistic payout of going fixed makes fixed more attractive at 22.5 bps. at 60-100 bps, it’s a much different situation. spreads over time have been quite wide because over the last 100 years, everyone always expected some mean reversion in interest rates. this didn’t happen for 30 years straight so variable has won for the last 30 years consecutively and thoughout most other time periods outside of crisis. you basically only win with fixed if there is a commodity crisis due to war or poor foreign relations.
my guess is that it’s because banks don’t compete at this term. 8.7% is a posted rate so i’m sure if you were actually interested, they would bring it down to ~5% or something like that but i’ve never known anybody to even consider doing that. at 5%, it would be a very stupid thing to do. banks only really compete at variable and 1-5 years fixed. all numbers above that aren’t even worth looking at. we have to pay 100-150 bps extra for a 10-yr fixed over a 5-yr fixed. not even worth considering.
interesting take. because a house is usually a couple’s activity, the wife’s conservatism would definitely play a hand. do american women get together and discuss how they all successfully locked in 30 year fixed rates while canadian women talk about how they successfully locked in a 5-yr fixed? i’m still confused. why would the markets look so different? i talk to canadians and americans every day and there is not enough difference between them to explain why americans accept or prefer a 30-yr fixed and why canadians accept or prefer a 5-yr fixed. the banks have some power, but at the end of the day the banks will compete for whatever clients are demanding.
i think recent experience in the U.S. great recession has a lot to do with it. people used lower initial rates on ARMs to stretch into houses they really couldn’t afford. So when short term rates went up they were screwed. If they had staying power, sure they probably would have come out on top but the path of rates stopped them out. Your average homeowner (say a stripper in Miami with 5 mortgages) did not understand the risk they were taking. Maybe it’s the snake bitten bias at work, but lots of people associate the problems the country experienced with the use of ARMs and not necessarily the fact that people were stretching affordability. The combination is what killed people.
that gets back to my original question. is the AF consensus that 15/30 has been the core mortgage product over time, except during the mid-2000s? or were ARMs prevalent in 1930 or something. i find it intriguing that ARMs, tied in with NINJA and liar’s loans, only really caught on in the mid-2000s in the U.S. to destroy the world economy and then fade away. so when canadians and brits were using 5-yr ARMs 30 years ago, americans never really tried them?