My question is: why would you fix for 30yr when you know you're paying multiple points to offset market uncertainty? Remortgaging every couple of years takes a bit of time, and shopping around, but is much cheaper.
To fix your monthly payment for the next 30 years.
Furthermore, with a fixed rate mortgage you can benefit from interest rate volatility since you can always buy back the debt at par. In practice this means you can:
1. Take out a fixed rate loan for $n at x%
2. If the rate doubles (to 2x%) you can refinance and you now only owe half ($n/2)
3. If the rate falls to x% again you can refinance again and now you owe the original amount ($n/2) at the original rate (x%)
This ignores the cost of refinancing the loan, so you’ll be paying some fixed sum for that (which is lost), but if rates moves sufficiently this is a huge benefit that you don’t get with a variable rate mortgage loan.
* This is based on how the Danish Realkredit mortgage works. I’m not certain, but I believe fixed rate mortgages work the same way in other countries.
Why do you refinance if rates go up? Surely the point is that if rates go up you've locked in a better rate
How does half your debt disappear if rates go up?
> Why do you refinance if rates go up? Surely the point is that if rates go up you've locked in a better rate
You don't have to, but you can choose to either (a) keep the same rate and owe the same amount, or (b) get the new (higher) rate and owe less.
> How does half your debt disappear if rates go up?
It doesn't exactly. However, the market value of your mortgage loan halves if the rate doubles (roughly). This means you can:
1. Take out a loan for half the original amount, at double the interest rate
2. Buy back your original loan
3. Destroy the original loan (which is fine since you are both creditor and debtor for that loan)
This leaves you with the loan taken in step 1.
To understand why it works this way it's instructive to think of a loan as an exchange of wealth for income. One party has some savings (wealth) and would like to exchange it for an income (e.g. to pay recurring expenses). Another party has an income and would like to trade it for wealth (e.g. to buy a house). Viewing a loan in this way, the interest rate is nothing more than the current price of a certain income stream (measured in percent per year).
For example, let's assume that the current market price for an income of $2 per year is $100. This is equivalent to an interest rate of 2% per year. I have $100 that I'm willing to part with for an income of $2 per year, and you have an income of at least $2 per year that you're willing to sell for $100. We make the deal. Now, the day after we shake hands to make the deal, the current market price for an income of $2 per year falls to $50. This is equivalent to a doubling of the interest rate (from 2% per year to 4% per year). I still have the income of $2 per year that I paid $100 for yesterday, but if I want to sell this to someone else I can only get $50 for it. And if you were to ask me to buy back the loan for $50 I would have nothing against that, since I could go out immediately after and buy the same $2/year income for those $50.
If you've sold your $2/year income for $100 yesterday, why on earth do you want to buy it back and resell it for $50?
e: Oh wait I see. You want to go to the bank and say "I know I owe you $100+interest over the life of the mortgage, but what if I just pay you back $50 right now and we call it even?" Does that actually work?
So, why can't you put on a funny hat and glasses, get a new mortgage at the higher rate, and then go buy your existing one at a discount?
Sure, but .. nothing else is fixed for those 30 years? Not your salary, the price of fuel, your place of work, life circumstances? And you're paying a premium at the start for this.
It's more apparent in the UK where you can choose how long you want the fix for and see the interest rate you're offered go up.
> you can benefit from interest rate volatility since you can always buy back the debt at par.
Obviously the bank knows this and charges you a small premium over the spot rate so they don't lose money.
> If the rate doubles (to 2x%) you can refinance and you now only owe half ($n/2)
I don't understand this: the amount outstanding - the redemption value - of a fixed rate mortgage is known in advance at every month throughout its term, regardless of what the market interest rate is?
Ideally one could renounce the citizenship, oh wait...
Even among fixed rate products, there’s an option to buy down the fixed rate. Those usually have a point in the future where all choices are about the same, shorter favoring not paying points and long favoring buying discount points (this crossover point varies over time by current and expected rates, but is in the 4-8 year range typically).
It is "their house" and things like that also, but I hesitate to directly say that they own it.
FYI you're describing a bond loan. Most countries, including America, don't really offer these, so most people won't understand what you're talking about.
[1] http://www.nasdaqomxnordic.com/bonds/denmark/microsite?Instr...
https://bebusinessed.com/history/history-of-mortgages/
Fannie and Freddie basically agree to "back" those new mortgages (typically buying them from banks and selling them off later) as long as they conform to certain requirements - 15 or 30 year terms, 10-20% down payments, etc.
It's a massive subsidy for the housing market in the US, but also addresses the social goal of making housing accessible. You can get a mortgage and the monthly payment (interest + principle) never changes over the 30 year life of the loan.
Low rates?! BOA is offering me 4.9% on 400k/800k, fixed for 30yr. But they still want 4% for a 5year ARM. Even after income tax deductions, how the hell do Americans afford houses with this sort of nonsense.
I guess that's what TFA is really driving at. It's getting hard to lend money on housing in the US.
This is an incorrect statement. It is true only if short term interest rates (on average) remain flat or decrease over the next 30 years.
Put another way, by getting a fixed rate loan you are paying for insurance against rising interest rates (+inflation), you’re saying it’s ALWAYS cheaper not to buy insurance - but the honest answer thsts probably been true recently, but not always historically, and may not be true in the future.
If the interest rates tip up for an extended duration, yes, it's possible that longer term fixed rates could be cheaper, but of course the banks insulate themselves against that possibility with even higher rates if they suspect it's likely.
It's possible they won't insulate enough. IME, betting against banks looking out for #1 is foolish.
Here in Belgium I think most people got those.
>why would you fix for 30yr when you know you're paying multiple points to offset market uncertainty?
Because my rate was 0,98% fixed for 20 years here in Belgium. I'd have done the same if I needed 30 (which is rare here as 20 or 25 is more common) The chances of coming out ahead long term starting out with a higher variable rate are rather slim
Because you are leveraged to the gills and a rate hike could lose you your entire principal.
At least in the US it is always better to get a fixed rate loan (meaning fixed for the life of the loan, typically 30 years).
This means your mortgage payment can never go up no matter how high rates climb in the market.
But if rates go down, you can always refinance to a lower rate and ratchet your payments down and lock them there.
It's as close to a free lunch as thing come. Your housing payment can never go up but can only go down.
I don't know about that. I recently got a 10/1 ARM at 3.75% for my second home and it was a full 1.125% below a 30 fixed due to FHFA changes [0].
[0]: https://www.ezhomesearch.com/blog/second-home-mortgage-rates....
In Germany, 15 years, 20 years, and up to 30 years is common. I took 20 years.
A close friend of mine working at a bank has an internal benefit, that the 10 year fixed rate applies for her as a fixed rate for however it takes to pay-off.
Loans lower 400k are easier to issue, I learned in the process. Because >400k has much more requirements for the bank on collateral required by the regulation authorities.