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January 3, 2008

Mortgage question--are variable rates no-nos?

Just curious about the community's opinion on mortgages right now. We're deciding between financing 80% of our purchase with a jumbo loan at just over 7% (fixed)--or taking out a conforming loan for 65% of the price at a much lower rate and financing the remainder 15% through a home equity line-of-credit (still with 20% down).

The latter rate is, of course, variable (at prime) which we are worried about with the uncertainty of financial markets. But spliting the mortgage in this way could save us a lot if rates don't skyrocket.

Any advice? We plan to stay in the place for the long-run--hopefully, 10 years or so.

Thanks!

Comments

Why not do the other 15% through a fixed hoe equity loan?

I did a very similar deal about 2 months ago with Commerce Bank and it worked out very very well. I think their home equity rates are around 6.75% right now.

Variable Rates - Especially lines of credit - will go up and you will need to adress it with a costly refi a few years down the road no matter what.

Posted by: guest at January 3, 2008 9:16 PM

depends. what are the details of the variable loan? any caps? how often does it reset? what is the reset based on?

Posted by: guest at January 3, 2008 9:17 PM

Thanks so much for the quick response. 9:16--that's exactly my question: if home equity rates are sure to go up, why would someone use one if you'll need to refi in a few years? Wouldn't it just be smarter to fix the whole 80% now at 7% and thus avoid a refi later?

I need to get the details of the reset...I assume it's set to prime.

Posted by: lah at January 3, 2008 9:28 PM

If you will be living in the property for the long run, look into fixed rate mortgages.

Posted by: Ysabelle at January 3, 2008 11:00 PM

One size does not fit all, people! ARMs have their place. You need to find out which rate the variable loan is set to, how often it resets (monthly, quarterly, bi-annually?), if there is a cap on the increase over the reset periods and/or over the life of the loan. Is there a prepayment penalty?

The real questions are about you. Do you expect to make more, less, or the same money over the next few years? Are you expecting an inheritance or any other windfall that would allow you to pay off the equity line in some shorter period of time. In these type of situations, it is often better to get the lower rate on the first with a variable second instead of taking a higher rate jumbo and refinancing later after you can pay down a large chunk.

Talk to a morgage broker who actually has several products offer about which is best for your specific situation. If you think they are all crooks and are pushing one form over another, ask them how they get paid on each. A full service broker isn't going to steer you to the wrong product to make more $ because they have several types to offer.

Posted by: guest at January 3, 2008 11:56 PM

I may be wrong, but I think everyone including the OP is confusing the issues. It doesn't sound like the OP is talking about ARM loans. (Arms are the loans that have been getting a huge amount of criticism because they offer low introductory rates that intice people into buying more house than they can afford.) You're basically talking about a HELOC (home equity line of credit) or a Home Equity Loan. HELOCs are generally pegged to Prime plus or minus a small rate based on your credit rating. i.e. if you have a 720 credit score, you could get a HELOC from Chase for Prime - .50%

Arms are the rates that you have to be caution about resets. HELOCs don't reset, they are pegged to prime and change when the fed decides to lower or raise interest rates. This rate does not typically move with mortgage rates. Mortgage rates move usually with the Ten Year note.

If you have the ability to qualify for a conforming loan, depending on how much lower the rate is, I'd take the conforming loan.

Good luck. As long as you're avoiding PMI, which I think you are being you're putting 20% down, I think you'll be fine.

Posted by: guest at January 4, 2008 12:41 AM

just do a spreadsheet and enter your best and worst scenario (highest variable rate) for both choices, and see which you like depending on your outlook.

my opinion is they are going to try to save this economy from recession in an election year by printing money - dropping rates like crazy. This means inflation or stagflation (yikes). That scenario might help your variable rate but refi would be hard if home values drop and/or lending standards tighten further due to banks in pain. On the other hand fixing for 7% for 30 years is going to look pretty sad for you with fed funds at 3%!

I really can't see them raising rates for 12 months. If they do, it is because the economy has recovered and so you should be able to catch a refi, or personally be in a healthy financial state and pay off that variable part early.

Posted by: guest at January 4, 2008 1:28 AM

Lets see over the next few years will interest rates go up or down WTF do you think? FIXED RATE unless you are looking to see if you can get some government bailout down the road, you know that might not be a bad idea. I would ask The What for his advice. Someday this war is gonna end... because some fucking A-rab terrorist is going to bomb NY again and then we are all fucked.

Posted by: guest at January 4, 2008 1:53 AM

My advice is get a fixed home equity loan on the second instead of a heloc.

That way you lock in a low fixed rate for the conforming and a slightly higher, still lower than 7%, fixed rate on the second.

this is the best rate I've seen:

http://bank.commerceonline.com/personal_banking/home_equity.cfm

Posted by: guest at January 4, 2008 9:31 AM

You all are awesome. Thanks for much for the smart, insightful advice. Your comments really clarified things for me.

The site is such an amazing resource!

Posted by: lah at January 4, 2008 9:56 AM

Opinion Only : 7% on a jumbo, I would go with it. I think rates are low and will only go up eventually. Gut reaction from a risk averse scaredy cat.

Posted by: cornetor at January 4, 2008 10:06 AM

Some very helpful mortgage calculators here:

http://www.vertex42.com/ExcelTemplates/

including an ARM calculator. Just punch in the values and you can play around with different scenarios

Posted by: greenwood slope at January 4, 2008 11:50 AM

FYI - I was in a similar situation and evaluated that the 7 year fixed-rate, interest only jumbo + adjustable rate heloc allowed me a little more breathing room on a monthly basis. The heloc was a small portion and I reasoned that I could pay more down on the principal with rates on a downward trend (and likely to continue or stablize through 2009). Please note, I just locked in a refinance of my original jumbo at 5.625% (fixed IO), no fees or points at Citi - this morning. Rates are falling and depending on your situation and if you are disciplined, a fixed-rate interest-only mortgage gets a very low rate. The difference between 5.625% and 7% on a monthly basis (use 500k for mortgage - interest only vehicle) is about $573/month. I prefer the fixed rate IO on the jumbo. Not for everyone, but maybe a consideration. Posts 11:56, 12:41 and 1:28 offer good input

Posted by: guest at January 4, 2008 11:51 AM

Hi Mortgage,

I am doing exactly what you are considering right to avoid the jumbo, partially because of the uncertainty around jumbos, the more difficulty qualifying, and the higher rates.

I am banking on interests staying stable or going down over the next couple of years, which will give me time to pay of the HELOC. Given the outlook for the economy and Fed policy, I think this is a reasonable bet. Otherwise, I can lock in at the then current rate at any time without penalty to protect myself from rising rates.

I see huge differences on HELOC rates, so shop around. Arrange for an automatic deduction from an account at the same institution and you may get another .25 off the rate.

You get full tax deductions for interest paid on the HELOC as well. Given the spread between jumbo and conforming rates, the current downward trend on Fed rates, which ultimately drive HELOC rates, and if you make sure you can convert to a fixed interest loan later, your plan makes sense to me.

Posted by: guest at January 4, 2008 12:08 PM

First of all, adjustable rate mortgages are not "bad" or "risky" per se, they just expose the borrower to a different set of risks than a fixed rate mortgage. From a financial perspective, you want to borrow at an adjustable (or floating) rate if you think interest rates are going DOWN, and are at risk if rates go up. With a fixed rate, you gain if interest rates go up, and lose if they go down. By splitting your debt obligations among both, you are effectively reducing your risk profile (as well as your potential for gains due to interest rate shifts).

Assuming your 10-year horizon is reasonable, I think your plan sounds like a good one. (Any chance you can finance the fixed rate portion at a 15-year rate?) You may want to set that savings aside if interest rates do come down, however, in case they start to go back up in the future.

One thing to remember. HELOCs are typically an INTEREST ONLY payment (though you are welcome to pay down principal as well at no additional cost), so you won't be building equity in that portion of the debt unless you add more to the monthly check.

Posted by: guest at January 4, 2008 2:10 PM

HELOC's are stupid for this kind of situation, you should consider a HEL (Home Equity Loan) instead - You can get a fixed rate under 7%, benefit from the low conforming rate on the bulk of your mortgage and save yourself a ton of money on a possible refi down the road with HELOC...

Posted by: guest at January 4, 2008 4:48 PM

if anyone is interested, my prediction on interest rates is as follows:

1. In 2008, interest rates will go a bit lower to maintain economic growth in election yr.
2. In 09, inflation fears will push rates above where they are now.the main export o
3. In 2010, our new alien overlords replace our current economic system with one based upon Belgian waffles, Earth's main export.

Posted by: slick at January 5, 2008 4:40 AM

Thanks again for a great discussion and excellent advice. All things considered, I decided that a HEL (loan not line-of-credit) was the best option here--since it gives us the lower fixed rate without the uncertainty of the variable rate. For some reason, the rates we were quoted for a HEL were higher than 7%; perhaps it's because they are higher with the bank we are getting the low fixed rate with (cause my credit score is in the 700s). But even with the higher HEL rate, this scenario makes the most sense.

Posted by: lah at January 5, 2008 10:20 AM

Glad you are getting great feedback..I just wanted to let you know about a new guy I found online Brian Scott Cohen. I just locked in my rate on a 2 family property Jumbo mortgage my rate through Brian is unreal. I heard you talking about 7% on Jumbo. I got 6.5% which is amazing..Here is his number it can not hurt 646 584 8009

Posted by: guest at January 6, 2008 10:52 AM

I recently was approved for a VA home loan. When the paper work went to the underwritter
I was required to write several letters.

1 explaining why I filed bankrupcy in 2002

2nd since I was retired What I was going to do to be sure I pay my bills on time/live within my means on a fixed income

3rd What I have learned from past derogatory credit history that will help me continue to make payments on time.

Then they requested 3 months of bank statements on how I spent my money.

According to the Veteran Admin website they should only hold bankrupcy against you if it is 2 years or less.

My credit scores were in the 600's highist 658.

They approved the intial loan application. But when the underwriter got it it was everyday want a letter treating me as a little kid. This company only does VA loans

Can they do this? make you write letters, explain and prove how you spend your money?

Posted by: guest at July 9, 2008 7:52 PM