T Nation

Mortgage Term Advice


#1

I'm just wrapping up the purchase of my first home, and I am trying to decide between the various fixed rate terms they are offering. I'm looking at a 20 year amortization, and trying to decide on a term of between 4 and 10 years.

On one hand, there is the demographic based predictions that interest rates, etc., will stagnate when all the boomers shift into retirement mode. Then on the other hand, because of all the money printed over the last while, interest rates will spike fairly high sometime in the near future.

I can't really argue with either, but I am thinking of going long, say 10 years, which gives me a rate of about 5.25%. This protects me in the event of 15-20% rates coming back in the near future, but costs me more over the short term.

Going for 4 year term would get me a 3.79% rate, and save me a good chunk of cash, but only as long as rates don't skyrocket 4 years out.

Does anyone have advice, or is there anything I'm missing?


#2

So are you saying fixed for 4 yrs and then adjustable after? If so, you are taking a big chance. If rates even do go up and you have to rewrite (if you have that option), you will have to pay closing costs if you get a new first motgage.

5.25% for 10 years isn't bad for what I've seen in the last ten years of the banking world. I can't say anything of mortgage companies.


#3

My plan was to wait and see what the rates are like at the expiry of the original loan term. I would probably lock in for another term at that point, but it would depend on what the general outlook is at the time.

That's also why I am looking at a 10 year term, as the balance would be reduced to the point that if rates were to increase, it wouldn't have as much of an effect.


#4

Go fixed as along as you can. I would recommend against any variable IR. 10 years sounds pretty solid and if you don't plan on keeping the house past 10, then 10 is a good term.

Good luck on your home and make sure you have a good engineer to check for structural damage. I'm not talking about the evident damage that a blind man can see, I am talking about the foundation. A friend of mine got screwed because the structural engineer (inspector) didn't do or was not requested to do an integrity check of the foundation. When they tried to get some repairs done, the piping company said that their foundation needs repairs and the inspector should have caught this. And to make matters worse, the house was less than 10 years old. The soil in Oklahoma tends to cause the house to shift and crack.


#5

IMO, your plan is dumb. Aren't the 30 year rates still under 6%?

Just get a 30, and refi if it goes lower in 10 years. Then you can pull out equity too if need be.


#6

Wrong time for variable rates. Lock in on something low.


#7

What those two above said.

If you can lock it up for 20 years, go for it.

Inflation is a-coming and you can sit it out with a shit eating grin.


#8

First of all, thanks to everyone for their replies.

In response to the 30 year recommendations, I'm only going 20 years on the amortization, and its closer to between 7% - 7.5% on a 25 year term in Canada. Also, any longer than a 10 year term and the increased rate will make payments higher than I'd feel comfortable with over the next couple of years.

The only reason I am considering a shorter fixed term is because of the whole age-wave theory put forth by Harry Dent. While I don't think that its' definitely going to happen, I can't find a good reason why it isn't going to happen either. If it does happen, will we have a first hand look at what Japan has gone through? I guess I could try and refinance then, but my understanding was that banks cover their own ass and soak you with penalties, which makes it pointless at that time.


#9

I'd go with a 10 year interest only mortgage with a bubble payment at the end, with a rewrite at the end for another two years. I'd paid off a few houses with this method in 12 years and paid less than paying it off 20-30 years.

If you paid the interest plus what you would on a regular payment, you cut the payment amounts down faster and that cuts the interest down substantially.


#10

10 year fixed Interest Only. x2