Just got a house but may not settle for 120 days. Most mortgage companies will only let you lock for 60 days. 30-year mortgage here by the way.
At 4.25% I can’t afford to see a 50-100 basis point move up in the next 2 months. I’ll get creamed.
Any advice on what to hedge my bets with? I was thinking TBT, TMV, etc… but didn’t know if anyone else knew of anything better.
Well, I guess one could do the two-bond hedge, just without owning the mortgage.
I’d look into some of the 3-month Libor ETFs. And if you’re wrong about rates going up that quick, you won’t get dinged to badly on them.
yeah but long term rates could increase while short term rates could decline or do nothing. Just trying to get aligned here.
Maybe options on the long-dated inverse ETFs - since I have a well defined timeframe.
Use DTYS since the 10-year is the most applicable rate.
You’re likely pretty over extended if a 50bps increase will kill you. That’s $200/mn on $500k mortgage. That shouldnt be a big hit if you’ve got a $650k residence. I’ve always rolled straight variable (ARM for you yanks) on my residence and investment property. I’m like a bank, borrow in the short end, invest in the long. I’m not issuing a 30 year bond. A 200bps differential is insane to pay. Then again, the 30 year has always puzzled me (Canadians rarely go beyond 5 year terms).
It won’t kill me, but I’m more scared of a scenario like last year when they jumpd over 100bps. $400 a month doesn’t seem like a terrible amount, but it keeps us from saving more.
Settle sooner.
It was recommended to me to get the 30-note and make payments as if it were a 15-year if you intend to be in the house through most of the mortgage. That way you get more tax deductable interest in the short term (another plus for the insane US tax code) but still pay it off faster and save interest in the long run.
More tax deductible interest is still a negative. I’m pretty sure most studies will show that variable rates outperform fixed rates over the long term. And the studies I’ve seen are Canadian, meaning variable versus 5 year. Variable versus 30 year should be a no brainer in favor of the floater.
The other thing to consider is penalties for refinancing. I can sell or refinance my properties tomorrow with tiny penalties because I’m on the floater. With a fixed, you can get slammed if rates fall even a bit. What’s the duration on a 30 year note? I’m not sure if prepayment penalties work the same in the US as Canada, but if they do, a 1% decline in 30 year mortgage rates just one year out would slam you with a penalty of $150k if you had to refinance. That sounds like a massive risk.
Depends on the era. The last 30 years, yes.
yeah… I have a 30 year fixed 3.75% on my mortgage. I kinda doubt an ARM will outperform that in the same time frame point forward. As always, YMMV.
My note has ZERO penalties for prepayments. I can prepay however much I want, whenever I want, if I want. If you do refinance, you’ll get dinged for closing costs but you won’t get hit for prepayments. Again, this is all dependent on your note, but most normal ones in the US don’t have prepayment penalties.
Also just to add, I’m relatively well versed with US mortgages. In my old job, I was on a consulting project where we did a lot of work with reviewing 2005-2009 mortgage operations for some big banks. Back then in the subprime era prepayment penalties and all sorts of consumer unfriendly stuff was run of the mill for non-prime borrowers. Since then terms are pretty standard and vanilla. The project was shit canned after the 2012 midterm congressional elections, banks settled for hundreds of millions in penalties to the feds with no admittance of wrongdoing, because the whole exercise was a political stunt to show the public that Obama and Company cared about Joe Six-pack.
So its a 30 year open mortgage (to use Canadian terminology)? That sounds pretty close to the worst possible investment from an investors perspective. And in theory the fixed rate on offer should be the market view of the future ARM rates over the term. An indexer would be partial to whatever mortgage offers the most flexibility, unless you think you’re smarter than the consensus.
^ it does seem like a bad deal for investors. I guess that’s why most banks package off their loans and sell them. It wasn’t 6 months after I closed on my house/loan that I got a letter saying my loan had been transferred over to good ol Freddie Mac.
I don’t pretend to have any ideas about future interest rates other than they’ll be higher. So a sub <4% tax deductable fixed rate mortgage seemed like a good deal.
Buy bank stocks?
Yeah, have zero prepayment penalties definitely makes the 30 year more appealing. American investors must be real suckers to buy that garbage. No matter what with the 30 year, you’re going to lose as an investor. Rates go down, it gets refinanced. Rates go up, and you’re toast. For 30 years! What garbage!
Were sold to the suckers in America and the World by the truck load. With a sufficient discount, almost anything can become a good investment though.
Presumably these things are sold because they can be hedged. It’s hard to see anyone saying that 3.75% is going to be a good annual return over three decades unless they expect long depression (Japan-like, not entirely implausible), major war (also more plausible these days), or catastrophic climate change kicking in (also not entirely implausible, though probalby not enough to justify 3.75%).
So it’s the presence of low US treasury rates that can be used to hedge the mortgages. My guess is that the hedge ratios won’t be as stable as one thinks on the way up, but it’s still not a bad approximation.
It really is a puzzle how treasury rates will ever go up to normal 4-5% real return range without pain in many places. The only real way to do it is to raise rates while there is an economic boom - a bit like making a kid’s vegetables go down easier by dousing it in cheese, but it’s hard to see where that boom is likely to come from, particularly since the bottom 80% don’t seem to have much extra purchasing power to fuel consumption increases and are already fairly tapped out in terms of how much debt they can support.
I just want Yellen to keep her trap shut for the next 6 weeks. That’s all.