30 yr fixed jumbo vs 5/7/10 yr IO

excellent question I'm at that same spot and could use some advice.

If you really believe your will be there for 20 years, you may want to consider:

1) In this environment, a larger down payment should get banks to move a bit on the 30yr rate. Shop around and ask what the rate differences are for a 20% vs. 25%-30% down payment
2) Check out the 10/1 ARM, the spread may be significant and you can refinance to a 15 yr or another 10/1 after 10 years

I personally would not get a 30 year loan. I would be willing to take the risk on the adjustables. Over 10 years or maybe 7, I'll take the risk that there will come a time where I can refinance either into a fixed rate or maybe another 5/7/10 year adjustable at a rate thats competitive, especially one thats competitive with the 7+% jumbo 30 year rates that are available now.

What about a 15 year fixed, its double principal but it does give more security, and current rates are much better than 30 year fixed rates. I am hopefully going to have a commitment on a 15 year fixed loan very soon, for almost two million. I'm putting down about 30% but getting a rate under 6.

ccdevi, what do you mean by a 15yr giving you more security?

30-year fixed if you plan on staying there. There is no guarantee that you will be able to refinance, and interest rates are at historical lows. If inflation continues to rise interest rates will have to rise, as well.

Imagine taking an ARM in the late '60s, with low interest rates, and then having to refinance it in the '70s, with high interest rates.

Let's say after year 6 interest rates are up 2%. You decide to wait to see if they will come down, but then they go up another 2%.

You screwed!

The only way I would take out an ARM is if I could afford to pay the whole thing off, or if I KNEW I wasn't going to stay in the place longer than the fixed period.

If you can get a 30-year at an attractive rate, I would go for that. As was said before, we are at relative lows for interest rates and you can't predict the future.

steve makes a good point, he is more risk adverse than ccdevi and I, and risk tolerance is really what this choice comes down to. I have no worries about a 7/1 or 10/1 ARM as long the spread is significant enough in the short term to justify it. There are many options at the end of 10 years, when you (presumably) have much more equity in your home, wealth picture has changed for the better, and you can refinance to a (potentially higher) rate. However, you can't bank on any of this, which is steve's point, but I am comfortable with that risk and don’t lose sleep over it.

There should be a premium for an IO vs. standard ARM. I don't see any reason to pay that premium in the discussion above, so if I were looking at ARMs, I'd be looking at fully amortizing ARMs.

As I've said, JuiceMan, I have an interest-only 5-year ARM, but I can pay off the principal in a single bound. Therefore, I'm comfortable with the risk. I would certainly look at the maximum reset terms and make a forward worst-case scenario and see what it would mean to me. If there's no way I could afford it under any circumstance, I wouldn't do it.

BTW I'm not risk averse. In fact, I love risk and have a very risk portfolio with lots of margin (though I just cut back expecting some recent gains to be pared). That said, I only invest in risks I can predict, and I can't predict interest rates 10 years hence.

swonger, all I meant was that with a 15 year fixed loan you have 15 years of a set interest rate as opposed to 5, 7 or 10 with a 5/7/10 arm. Of course the price you pay is double amort.

steve, we are not at historical low interest rates, they are relatively low, but they were significantly lower say 5 years ago, especially jumbos.

of course steve has a point though, you can get caught. I don't know about the 60s to 70s example, there were periods in the 70s where rates were low. But for example if you took out an arm in the early 70s and waited past 77 or 78 to refinance, you got stuck in a very bad interest rate period, which didn't really get back to reasonable levels until about 86. Makes me really think you should go for the 10, not the 7, although again I like the 15 year fixed. And again this is because the 30 jumbo rate right now is so bad (I'm assuming over a point of spread, maybe close to 2).

steve, your statements are a bit extreme. Worrying about maximum resets 10 years from now vs. saving a point for the next 10 years is an easy decision for me. It is different for everyone, but your statement regarding paying off the entire principal is about as risk adverse as you can get. For a reset to be a problem you are assuming at the end of 10 years:

1) Income has not grown significantly
2) Wealth has not grown significantly
3) Rates are much higher at reset time
4) You couldn't amortize your balance over 30 more years to keep the payments the same
5) You couldn't sell or rent the place

For people in Manhattan buying $1M+ apartments with 20% down and a long term view, I don't see the level of risk you are implying. I do appreciate (as should the OP) a balanced opinion regarding that risk, but in my opinion, you are taking it a bit too far.

JuiceMan, you're a finance guy, so you claim. Do you ever do worst-case scenarios in your analyses?

Any investor will tell you: don't look at how much money you can make, look at how much you can lose.

If you make an investment in a property and you don't do the worst-case scenario and understand it, then you're likely to get burned.

I am very risk-averse when it comes to playing with where I live, and what is for most people the most expensive asset they will ever buy.

What guarantees do you have, 10 years hence, that:

1) Income has grown significantly
2) Wealth has grown significantly
3) Rates are not much higher at reset time
4) You can amortize your balance over 30 more years to keep the payments the same
5) You can sell or rent (at a profit or loss?)the place

You don't know any of that. We're not talking about doing something whenever you feel like it. We're talking about something - the reset - that has a date certain, and any number of variables that no one can control or predict.

There could be a war. A terrorist attack. A stock market crash. A property market crash. You simply don't know.

Always finance long-term assets with long-term liabilities.

If I have stock I can sell it tomorrow. If prices fall too much then I get a margin call, basically capping my risk because the brokerage won't let me lose any more money because they lose money. You can't do that in a house. It is illiquid.

Swonger: The main benefit of an IO mortgage as I see it is that you have control over your cashflow: by paying interest only you pay the lowest out-of-pocket carrying cost for your property for whatever the lock-up period is. As such it remains a product of choice for year-end bonus type of compensation. Want to pluck down the $50k after tax you get in December towards the loan? That is your choice and your monthly interest payment will decrease accordingly (as opposed to a traditional mortgage where your monthly payment will stay the same until the loan is paid off) , Have a great investment opportunity you want to jump on instead? The IO gives you that flexibility and as such remains perfect for wall street types.
Expanding on that argument, if you are 1/ more risk averse 2/ do not have typically receive a substantial bonus yearly 3/ aren't confident you can generate better returns outside of paying down your mortgage then an IO is probably not for you.

"Do you ever do worst-case scenarios in your analyses?"

Of course I do steve, do you ever do best-case scenarios in your analysis? I do both and, I usually end up somewhere in the middle. Jeez, I said it was good to highlight the risks of a 10yr ARM, which you did. Just because something may happen doesn't mean it will. No wonder why you never leave the house, are you afraid you'll be struck by lighting, get hit by a bus, or be killed by falling sheep? Do you get on planes? Risk is everywhere steve but everything with you is an extreme worst case scenario. How in the hell do you stomach emerging markets? I saw Roubini speak the other night. You two would love each other.

nobody said anything about guarantees. clearly there is an element of risk to having an ARM and you balance that against the benefit of the better rate for the initial period.

And why make unqualified statements like "always finance long term assets with long term liabilities." Although I'm pretty sure you copied that from some investment giant. Obviously it all depends on the numbers. If there was a 5 point spread, the ARM would become more attractive. There has to be a pricing point where the benefit outweighs the risk. That point varies for different folks but its there nonetheless.

There is definitely a big spread between the 30 year and ARMs. But if you really think youll stay in the same property without refinancing or selling for 20 years. Then why not buy down the rate to something below 7%? Youll make it up over time. sunny_hong@countrywide.com

It depends on the spread, but if you can get a 10/1 for a point less than a 30 and have the discipline to save the extra $$$, after 10 years you'll have a nice little pile. Plus if rates do soar because of inflation, so should your earnings.

At the end of the day, though, go with the one you can sleep with.

I don't know why 15 yr fixed loans don't get more love. It's a lower rate than a 30 yr fixed and, given your 20 yr horizon, you'll have paid off the loan. That will give you the ultimate peace of mind. In 15 yrs, you won't have much dented your principal balance in either the IO or 30 yr fixed product. Yes, you'll have higher monthly payments, but if you can afford them, I would seriously consider a 15 yr fixed loan.

thank you all for the great feedback. i think i am leaning twds a 15yr or a 30 yr fixed jumbo now. thanks once again.

good choice swonger.

ccdevi, if you get that 15 yr loan commitment you mention above, can you share the name of the bank or broker? I am also looking at a ~ $2mm 15 yr fixed loan with a 25%+ down pymt.

Kiss, I will ask my contact at the bank if that's ok. I'll let you know.

Thx ccdevi.

First off I agree with Spieler1. Its all about who you are and what your situation is. The IO offers flexibility and the Fixed products offer security. I personally am a fan of the 10/1 ARM IO, I think it offers both.

As for the 30yr Fixed Jumbo you should not be paying more that 6.375% right now if you are a qualified borrower. I know the larger banks are at 7%+, but you have to know where to go right now. I have several boutique banks around 6.375% with no points on a 30yr and 5.5% on a 15yr. It depends on the exaxct loan amount, LTV and obviously the borrowers income and credit.

I can be contacted at mcohen@panamloans.com or be reaced at 646-723-2256, as for Mitchell

Just out of curiousity, I only check one or two lenders web sites. What are you guys being quoted on the 30 and 15yr fixed?

MortgageMan787:

I was quoted 3.50% on a 30-year fixed jumbo with an LTV of 95 and no points, fees or MI. If you can beat that, you have my business. Oh by the way, my FICO is 410, my back-end ratio is over 70, I can't document my income and my husband is in prison.

Seriously, why do you only check one or two lenders' websites? Are you really that lazy? Or are you fishing for gullible customers who will cough up the best quote they've received so you can beat it by an eighth and pocket the spread when you could really go lower?

Wow, someone is very upset about the current state of the market. I check one or two websites because they are the same two that all the brokers in the city refer their clients to due to their current "marketing contracts" aka legal kickbacks. The same banks that are convincing qualified borrowers that the going rate on a 30yr Fixed is 7.25% paying 1 point. Anyone is more than welcome to ask me for a quote before they tell me what they are getting. My rates dont change every day like others and they dont lend in incriments of 1/8's so it doesnt effect the YSP. Im sorry you are so upset about what banks and brokers have done in the past, but dont judge me or my business. Good luck with your husband. Hopefully he will be out soon and you can qualify for a full income loan and get lower than the 3.5%.

MortgageMan787:

I was in the business for a very long time. I was just having a little fun with you.

I don't understand where these rate quotes come from. They sound really high. I've been immersed in mortgages for a few weeks and 2 banks and one broker offerred jumbo rates on 30 yr. fixed jumbo of well under 7% without points and at least one bank was far below 6% for 3 points. This was in the last 7 days. These are for loans of under $1MM. If you are talking about more than $1MM loan, then I'm out of my league and take it all back.

West81, its ok. I kind of figured you knew the business. Just important that people know I am not giving the loans you were referring to and that what I can offer is for real. Its a stressfull time for all those involved in these transactions. Tired of seeing qualified buyers taking these crazy rates to get into a property.

Kylewest. What loan amount are you talking about at what LTV (%down)? Plus I cant say I would advise paying 3 points on any loan unless you know you are going to be there for a very long time. And even in that case it still probably doesnt make sense.

kyle,
the points only make sense if the break even # is in a time frame greater then you plan on staying in the home and you can afford the points. sometimes it makes sense to buy the points but the upfront pts are expensive. for example if you are taking a $2M loan and broker is charging 3 points, thats $60k upfront in fees plus Mansion Tax, title, mortgage tax, and other closing costs, may not be feasible for every one, i think its most important to get into the home with the lowest rate and lowest fees possible. i'm looking at no points no origination no fees and being in loans at $2Million at 6 1/2 rate, if you are interested in pricing me or have any questions please feel free to contact me Daniel, 646-419-4192 dledven@customcapital.net

Kiss, I got the commitment. 15 year fixed, 5.5%, no points, $1.8 mil. I am putting about 30% down. Apparently there are options better than BoA's 8.5% 30 year fixed (sorry, couldn't help myself, not meant for you). Anyway, if you're still interested, I'll ask the guy if I can give out his name.

CCDEVI, please do share. Everything im getting back is over 7% on a $1m loan, and im putting 30% down as well.

swonger, I am at 6.625% 0 points on a 30yr Fixed with either a Bi weekly (loan should be done in apporx 23 years) or a straight 30. Can lock for as long as 90 days with no fee. My 15yr is at 5.875% 0 points.

These programs revolve around strong credit, income and assets. Many of the portfolio lenders have raised their Jumbo rates recently but are still well below the traditional lenders.

mcohen@panamloans.com

swonger, 7+% on 15 year loans? that must be 30 years, no? and even then it sounds high. who are you talking too, hopefully not the big banks. talk to the smaller regional or local banks. I'll post or maybe email my guy's info (he's at a smallish bank based on LI) if he says its ok.

Swonger i'm at 6 1/2% 30 year fixed, with the same option of the bi-weekely payments, no points, no fees, $0 (zeros across the board), call me at 646-419-4192 or you can feel free to email me at dledven@customcapital.net to cover any and all questions.

ccdevi,

Yes, I am very interested in getting details on your mortgage lender. If you'd rather PM me the info, pls send to ikvwmail@verizon.net. Thx.

Kiss, i don't think those rates are still there, i'm looking at your scenario, and i can't find anything thats close to that- and i have all majors small regionals, and PL's. And even with the bond market movement yesterday with all re-pricing i still don't see a rate that resembles one from two weeks ago. if you would like to to discuss this further feel free to email me.