Updated over 8 years ago on . Most recent reply
Mortgage Options: 5 Year or 10 Year Fixed?
Hello and thank you for reading. Bottom line up front: Is it a reasonable assumption that Cost of Funds will be higher than 3.50% five years from now?
Additional Info: I'm purchasing a 24-unit in Pittsburgh and am comparing two loan options. Both options offer 25 year amortization periods with a 10 year balloon. Option #1 is 10 years fixed at 5.50% with a $2,000 origination fee. Option #2 is 5 years fixed at 4.75% with no origination fee. The interest rate with this option resets at Year 6 to a new rate of Cost of Funds+3.00% (this bank uses the 5 Year Treasury Constant Maturities Index as their benchmark). My exit strategy is to hold the property for about 10 years. I’ve done my best to compare the two options and have estimated that a reset rate higher than 6.50% in Year 6 for Option #2 is the tipping point where Option #1 becomes the better option. I’ve reviewed the Fed Dot Plot and tried to do additional research but am still unsure. I understand there is no crystal ball, but I’m hoping someone with more knowledge and experience can help me make an educated estimation as to the likelihood that my reset rate will be higher than 6.50% five years from now. Thank you in advance!