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March 18, 2008
Switch to a variable rate loan?
Here's a question for any finance savvy types. I have a 30 year fixed second loan for $480,000 at 7.1% and I have the option to convert this to a variable rate loan at prime minus a quarter, which would make the interest rate 5%. This would save me around $650 a month. Of course prime will eventually rise again and if I wanted to switch back to a 30 year fixed again there is no guaranteeing at that time that I would get 7.1%. Any advice? Snide comments?
Comments
1. Can you convert to a lower fixed rate?
2. How long are you planning to stay where you are?
Posted by: cortnyc at March 18, 2008 3:28 PM
How long is the variable rate locked in for?
1 Year...too much risk
Any longer depends upon how long you plan to stay in th house.
Posted by: daveinbedstuy at March 18, 2008 3:46 PM
We plan to stay in the house a long time. I would say a minimum of 10 years.
Because it is a second loan, 7.1% is the best we're going to get on a 30 year fixed.
If we convert to a variable rate, it will not be locked in at all. It will be set at prime minus a quarter.
Posted by: passthedip at March 18, 2008 3:53 PM
Let's start with the basics: your view. If you believe (or are concerned) that interest rates will go DOWN, then you borrow at an adjustable rate. If you believe they will rise, then you borrow fixed. I encourage you to think in the context of your complete financing needs, not just this loan. You say this is a "second" loan. Does that mean there is another, even larger loan? Is that fixed or floating/adjustable? Could you refinance ALL of it? Have you looked into that?
Also, are you absolutely sure that "it won't be locked in at all?" Usually, adjustable rate mortgages have an initial "lock" anywhere from 1 to 10 years where the rate stays the same. After that period, there rate can change, but often, there is a limit as to how much the rate can rise. Rates vary depending on the length of lock, but at 5.0%, I'd imagine that would be a short lock, 1-3 years.
Going ONLY on what you have said, i.e. you plan on staying a minimum of 10 years, you pay 7.1% now, and you have been offered an adjustable rate of 5.0% as an alternative, I would go with the 5%. Interest rates are going down - hey, the Fed cut TODAY and is likely to cut again in April. That will reduce your payments IMMEDIATELY, and given the seriousness of the problems in the housing market and economy, its going to be a while before rates start rising again. Who knows, things change, and maybe you'll be in a different financial situation 5 years down the road. If you want to be conservative, get the adjustable rate, but don't pocket the savings - use it to pay down the principal. At least that way, if rates do go up down the road, you'll be paying the higher rate on a lower amount of principal.....
my guarantee: advice always worth what you pay for it.
Posted by: slopenick at March 18, 2008 4:25 PM
Before taking 4:25's advice, check to see what your variable rate loan would be tied to, and then see how that rate (maybe LIBOR?) has been behaving.
Posted by: guest at March 18, 2008 5:25 PM
I think rates are going to go way up in a few years - once run away inflation becomes a bigger issue than credit crisis.
Posted by: guest at March 18, 2008 7:48 PM
It depends on your risk tolerance, which is a wholly personal issue. I'm more conservative - and I wouldn't play with an adjustable rate on a mortgage that was not locked for longer than the period I intended to stay in the house (but maybe not even then - as I could end up staying longer than intended.) I recognize that this stance could cost me. It did cost me a lot when I locked in my huge grad student loans that were some floating, some fixed at a nice fixed rate just over 7% - who would have thought a few years later rates would go so much lower? Not me, and I was locked in and couldn't refinance under the terms.
Yeah, no one has that crystal ball. If you like taking big risks, do it. If you don't, don't. No one here knows your risk tolerance. It also depends on how big the second loan is, and whether you are going to be able to pay it off before it matures.
Posted by: guest at March 18, 2008 11:05 PM
The fed cutting interest rates has no effect on mortgage rates. It's more closely tied to the 10 year t-bill yield. Mortgage rates have been inching up and the amount of available credit is tightening (including mortgages)
Posted by: guest at March 19, 2008 9:22 AM
Even variable rate loans lock for periods. They reset every 3, 6, or 12 months usually. You should look for one with limits to both how much it can rise from period to period and over the course of the loan. So, if it started at 5.5%, then 6 months later it couldn't go over 6.5% and maybe it's capped at 12%.
The question should not be what it would be like to have another $650/mnth. You need to ask yourself how you would be able to pay the 12% rate. If you can't, stay with your 30 year.
Posted by: guest at March 19, 2008 9:47 AM
HOW LONG IS THAT ARM FIXED FOR??? ANSWER THAT FIRST. THEN YOU NEED TO FORMULATE YOUR OWN EXPECTATIONS FOR INTEREST RATES....RIGHTLY OR WRONGLY>>>THAT'S THE RISK
Posted by: daveinbedstuy at March 19, 2008 10:11 AM
9:22 You are right that the Fed cutting rates has no effect on fixed mortgage rates, but it certainly has a very direct effect on the prime rate, which is what an adjustable rate mortgage is tied to. Long term fixed mortgage rates have been going up lately, but adjustable rates have been going down with the Fed's recent cuts.
Posted by: slopenick at March 19, 2008 10:25 AM
sounds like you are talking a home equity loan that is fixed vs a heloc that floats against prime.
I got a 30 year heloc from wachovia that is prime -1.
in the last 10 years prime got as high as 8.25% so that would give you 7.25% which is only slightly higher than your fixed in the worst case scenario (based on the last 10 years). You benefit from lower prime now so it may be worth it.
Bear in mind that this is interest only but I think a home equity loan is also.
This was taken out in the summer of 2007 so I do not know if wachovia is still offering it.
Posted by: guest at March 19, 2008 1:14 PM
I agree with 1:14. I think they are talking about heloc vs home equity. The question is are the past ten years a good indicator of the current economic environment? What about in the 80s when prime rate got as high 20%. Is it possible that this could happen again?
Posted by: guest at March 20, 2008 9:52 AM
Of course it is possible. And it is possible it could go even higher, your house coudl lose value, your credit could go down for other reasons (job loss, health issues) making it harder for you to refinance than you now expect. That's why people who depend on adjustable rate mortgages that they intend to refinance may save in the short run, but they are taking greater risks (than I personally am comfortable with) in the long run. To each their own...
Posted by: guest at March 20, 2008 4:57 PM
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