Rates tied to Prime Rate - Posted by James

Posted by James on May 07, 2004 at 18:32:34:

I am looking to keep the property for at least 5 years, but I plan on paying the principal down every month by at least $150/mo, so even if rates go that high within 5 yrs, the payments won’t be ridiculous because the loan balance will be reduced dramatically. At least I can take advantage of the low 4.9% right now!

Rates tied to Prime Rate - Posted by James

Posted by James on May 04, 2004 at 22:44:54:

Hi –

I have a few rental properties, and am shopping for a new loan on them. A mortgage broker quoted me a very low rate (below 5%), but it is tied to Prime (.90 over the prime rate). How good do you think this is? Is the Prime rate likely to go up quickly? The fixed rate is around 6.75. If i go with the prime rate one, I have potential to save a lot of interest on it, providing the prime rate doesn’t shoot up. Any ideas?

Re: Rates tied to Prime Rate - Posted by Brian (WA)

Posted by Brian (WA) on May 05, 2004 at 13:59:47:

James,

I would recommend a good cashflow strategy vs anything tied to prime. Whether you have a short or long term goal this strategy works for both. There are a couple of options that have a start rate of 2.95% and are tied to either the certificate of deposit index or the twelve month treasury. Both are slow moving indexes. Can create great cashflow and pay off early if used properly.

Brian

Re: Rates tied to Prime Rate - Posted by wes

Posted by wes on May 05, 2004 at 07:57:25:

There is currently a near 100% expectation built into the bond futures/options market that the Federal Reserve will raise the Fed Funds Rate in August. Could happen sooner but chances are less than 50%.

That does not mean that Prime rate will immediatly start up. But, once rates start to rise, that usually starts a trend that takes several years to run it’s course. During that time it is not unusual for the Fed to raise the rate by 1/2% at a time although it usually moves at 1/4%.

It’s really your gamble. Unless something happens to suddenly slow the economy, looks like we will see higher rates. Nobody knows how high they will go. You might have that Prime + 1 Low rate for years to come. You might see it higher by 4th quarter of this year.
The real question is what is your short/long term plan and how would rising rates effect you.

Re: Rates tied to Prime Rate - Posted by brenda mueller

Posted by brenda mueller on June 15, 2004 at 10:33:17:

I was wondering what you would do in my situation.
$210,000 with cibc better than prime mortgage for 5 more years…3.75-.25%=3.50 right now…I probably won’t be paying it off that quick. Is it worth the risk since a 5 year closed is @ 5.45, I am trying to deal with citizens bank and getting a rate of 5.15. with them paying $2200.00 penalty.

Re: Rates tied to Prime Rate - Posted by Eric_c

Posted by Eric_c on May 05, 2004 at 20:01:48:

Not to hijack his thread but I’m concerned with this because my primary mortgage is interest only locked at prime for 10 years.

I’m hoping I’m “safe” until my 2 years here are up. I’m at 4 percent right now but I fully am planning for 5.5 1.5 years from now when we will sell.

I am interested in the other loans that were spoken about here, we are about to get into a 5 property deal involving 1 mortgage, 1 land contract and 3 lease options. I’d like to have a good exit plan for financing all of these once they are seasoned.

Re: Rates tied to Prime Rate - Posted by wes

Posted by wes on May 06, 2004 at 07:21:41:

No one knows at this point what the rate will be in 2 years. I think you are right that it will be a bit higher than now. How much higher? Cannot say.

Below is a site you can look at a 10 year chart of the prime rate. In only January of 2001 the rate was 9.5%, so a loan program tied to that rate can be very volatile. Many people with these type loans only started looking at the prime rate in the past few years. As you can see on the chart, that has been an unusually low period of interest rates and not something one should expect to continue indefinitly.

If your exit stratagy is for only a couple of years, you should probably just stick with what you have as opposed to refinancing. However, for the peace of mind, for anything new you might buy, you might consider getting some sort of ARM product with a rate fixed for a few years(3,5,etc.).

Good Luck,