which mortgage to take?

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Incendiary
Posts: 478
Joined: Sun Jun 19, 2016 9:42 am

which mortgage to take?

Post by Incendiary » Mon Aug 21, 2017 4:22 pm

I have a choice between two mortgage options for a property I'm looking to purchase.

1. 10 year fixed at 4.9%
2. 5 year fixed at 4.375% and then 5 year fixed at the then-current 5 year Treasury rate + 2.75%

The way I see it, I should choose the first option if rates don't rise more than 0.9% by 5 years from today. I should choose the second option if rates will have risen by more than that in 09/2022.

Any thoughts? I realize no one can predict the future, but how should I choose?

vaught
Posts: 61
Joined: Fri Aug 11, 2017 2:00 pm

Re: which mortgage to take?

Post by vaught » Mon Aug 21, 2017 4:47 pm

Option 1.

I just think the potential gain of choosing Option 2 is far outweighed by the risk of choosing Option 2.

runner3081
Posts: 1402
Joined: Mon Aug 22, 2016 3:22 pm

Re: which mortgage to take?

Post by runner3081 » Mon Aug 21, 2017 4:50 pm

As you said, no one can predict, but it is safe to say that rates are very low right now.

There is probably a higher chance of them going up, then going down or staying at this level for the next 5 years.

Goal33
Posts: 576
Joined: Sun Apr 12, 2015 12:30 pm

Re: which mortgage to take?

Post by Goal33 » Mon Aug 21, 2017 4:51 pm

You should probably find a 30 year fixed at less than 4%
A man with one watch always knows what time it is; a man with two watches is never sure.

Incendiary
Posts: 478
Joined: Sun Jun 19, 2016 9:42 am

Re: which mortgage to take?

Post by Incendiary » Mon Aug 21, 2017 4:53 pm

The current 5 year treasury is 1.77%. It was as high as 1.95% on 7/7/17, but was 1.12% a year ago. I'm leaning towards #1 as well.

Incendiary
Posts: 478
Joined: Sun Jun 19, 2016 9:42 am

Re: which mortgage to take?

Post by Incendiary » Mon Aug 21, 2017 4:54 pm

Goal33 wrote:
Mon Aug 21, 2017 4:51 pm
You should probably find a 30 year fixed at less than 4%
This is for a commercial property. I don't think such things tend to exist.

denovo
Posts: 4111
Joined: Sun Oct 13, 2013 1:04 pm

Re: which mortgage to take?

Post by denovo » Mon Aug 21, 2017 5:00 pm

Incendiary wrote:
Mon Aug 21, 2017 4:54 pm
Goal33 wrote:
Mon Aug 21, 2017 4:51 pm
You should probably find a 30 year fixed at less than 4%
This is for a commercial property. I don't think such things tend to exist.

You are correct. I vote for the 10 yr
"Don't trust everything you read on the Internet"- Abraham Lincoln

bigred77
Posts: 1991
Joined: Sat Jun 11, 2011 4:53 pm

Re: which mortgage to take?

Post by bigred77 » Mon Aug 21, 2017 5:03 pm

You consider the intended holding period (or at least the financing period)

If less than (or around) 5 years, you go with option 2.

If you intend it to be a long term holding (over 10 years) then I'd go with option 1 (personally, 52.5 basis points wouldn't get me to take the interest rate risk).

If you don't know (then IMO you probably shouldn't be buying the property, but I digress) then you need to assess your ability to cope with a large jump in financing rates, if you have plenty of available cash flow to service, then you can afford the variable rate risk and take the savings up front if you want. If it's tight, I would opt for the certainty of a fixed rate.

Incendiary
Posts: 478
Joined: Sun Jun 19, 2016 9:42 am

Re: which mortgage to take?

Post by Incendiary » Mon Aug 21, 2017 5:10 pm

These are very thoughtful replies. Thank you, all.

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