Choosing a Thirty Year Mortgage Over an Five Year Every Time.
Case study on borrowers purchasing a $3,8 million dollar house choosing a five year rate. I didn't even talk with them about a five year as they told me this is their forever home. Dueling other loan officer convinces them they have secret sauce.
I had a young couple chose a 5-year mortgage at 6.875 no points over 7 percent 30-year loan no points. They were convinced that rates will soon go down. The competing loan officer promised a free refinance which is a fairy tale. No one can guarantee in the future that they qualify, that the loan officer is still at same company, that a super jumbo loan will ever be available at a lower price. What the borrowers didn't understand is that in the past lenders offered rebate pricing, or points as credit with a bump up in rate to cover costs. This rebate credit pricing isn't available much today, and maybe never available in the next sixty months. I told them I can match the five year but I didn't offer it with my other options because I believe it is an inferior choice.
The only difference in the .125% of rate was an interest only option which allows a slightly lower monthly payment. Sixty months is a short window of time. There is no guarantee rates will in fact decrease to allow refinancing. The margin on the five year loan is prime plus 3. The prime rate today is 8.5 + 3 = 12.5% rate today. Huge risk if rates increase or if they even stay the same.
It's important to consider the potential risks associated with a shorter-term mortgage. One major risk is that interest rates could rise instead of fall. If this happens, the couple would be locked into a higher rate for the remaining term of their loan, which could increase their monthly payments and overall interest costs.
Another factor to consider is the potential for refinancing. With a 30-year mortgage, the couple would have more opportunities to refinance their loan in the future if rates decline. This flexibility could allow them to take advantage of lower rates and potentially save even more money over the life of their loan.
Ultimately, the decision of whether to choose a 5-year or 30-year mortgage is a personal one that should be based on the individual circumstances of the borrowers. It's important to carefully weigh the potential risks and benefits of each option before making a decision.
The global economic landscape is currently navigating a period of heightened uncertainty, with inflation rates reaching multi-decade highs and central banks worldwide grappling with the delicate task of reining in prices without stifling economic growth. In this context, the prospect of rising interest rates has become a prominent topic of discussion among economists and policymakers.
Factors Driving the Potential for Higher Rates
Several factors are contributing to the possibility of interest rate hikes in the near future. One key driver is the persistent surge in inflation, which has eroded purchasing power and strained household budgets. Central banks, particularly the Federal Reserve in the United States, have signaled their commitment to taming inflation, and raising interest rates is a primary tool at their disposal.
Another factor influencing interest rates is the ongoing war in Ukraine, which has disrupted global energy and food supplies, further exacerbating inflationary pressures. Additionally, supply chain bottlenecks and strong consumer demand have also contributed to price increases.
Potential Impacts of Rising Interest Rates
An increase in interest rates can have a ripple effect across the economy, affecting individuals, businesses, and financial markets. For consumers, higher rates can translate into increased borrowing costs, making loans for cars, homes, and other expenses more expensive. Businesses may also face higher borrowing costs, potentially impacting their investment and expansion plans.
In financial markets, rising interest rates can lead to a shift away from riskier assets, such as stocks, towards safer investments like bonds. This shift can result in volatility in stock prices.
Considerations for Policymakers
Central banks face the challenge of balancing the need to curb inflation with the risk of stifling economic growth. Raising interest rates too aggressively could trigger a recession, while inaction on inflation could erode public trust and lead to expectations of even higher prices in the future.
Policymakers must carefully weigh the potential benefits and drawbacks of interest rate hikes, considering both economic data and market conditions. They must also communicate their decisions clearly and effectively to manage market expectations and minimize disruptions.
<sic> Steven Romagnolo "I have bad news for those who believe that the Fed is going to cut rates anytime soon: Santa is not coming down the chimney.
Core inflation is twice the target level and core is the toughest dragon to slay.
Come June of 2024 the yield curve will realize a full 2 years of inversion which is the historical time period before a recession would start.
The yield curve will un-invert either because the 10 year climbs above the 2 year or the fed cuts bringing the 2 year below the 10.
Powell has stated publicly that he believes that the market will help the fight against inflation and for those that understand "fed speak" that translates into the fed will stay out and let the 10 year climb above the 2.
Watch the yield curve and look for it to un-invert before calling for cuts from the Fed...."
The prospect of rising interest rates remains a focus of attention in the global economy. While higher rates may be necessary to combat inflation, they also carry potential risks for economic growth and financial stability. Policymakers face a delicate task of navigating these uncertainties in their efforts to promote a stable and prosperous economic environment.
Caroline Gerardo
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( 949 ) 784 - 9699
