OK, fixed or variable? Advice welcome

lendaddy · 02-11-2005, 06:23 AM

Just finished the meeting with my banker. We will be moving about $900k worth of commercial debt to them. I am looking at 13 YR amm with a 3 year balloons. Fixed at 8.25%

or variable at 6.5%. I really don't see the rate moving that much in 3 years so I am leaning Variable. Thoughts? Things I'm missing? Thanks.

legion · 02-11-2005, 06:35 AM

This is of course just my opinion on interest rates, so take it for what you will...

I see rates going up by as much as a point in the next two years...the fed keeps boosting the fed funds rate. My crystal ball doesn't take me out to three years. Still, assuming all other costs are the same, the rate would have to go up more than 1.75 points in the next three years to make the fixed atrractive...and I don't see that happening.

I'm not an expert, I'm not a financial planner. This opinion is offered caveat emptor. It's not worth the small amount of server space a Pelican it now takes up.

lendaddy · 02-11-2005, 06:51 AM

I agree, and the time I spend under 8.25% only extends the "red zone" of the initial fixed rate. It would likely have to get well over 9% before it would make sense to have gone fixed. I think it's a no brainer.

RANDY P · RANDY P's Garage

Caps on adjustment? What is the ARM indexed to?

lendaddy · 02-11-2005, 06:58 AM

Quote:

Originally posted by RANDY P
Caps on adjustment? What is the ARM indexed to?

No caps, but I can lock at any time. Indexed at .5% over prime.

Superman · 02-11-2005, 07:05 AM

I'd agree, Daddy-O. The Fed is protecting against inflation, but I do not think it is demand-push inflation. In other words, I don't see a white-hot economy where everyone's got so much cash lying around that there is intense competition for good to purchase. And I don't see taht happening any time soon. The Fed has to balance inflation with other considerations, and their grip on the money supply has quite an effect on "the economy." I'm not trying to make an anti-Dubya political statement here. I just don't see high interest rates right now or any time soon. It'd throttle what I consider to be a very tenuous economy.

It looks to be as close to a financial no-brainer as you'll find.

turbo6bar · 02-11-2005, 07:09 AM

It's a calculated risk. Is a $900 monthly savings worth the risk?

Normally, I would suggest the fixed rate, but the short ammortization period gives you quicker paydown. When you refinance the balloon amount in three years, you'll be carrying a lower principal amount.

A third option is run variable rate and invest the $900 savings in the company OR if you have no creative bones, simply throw the $900 at the loan principal. Don't use the savings for stupid *****.

RANDY P · RANDY P's Garage

Quote:

Originally posted by lendaddy
No caps, but I can lock at any time. Indexed at .5% over prime.

Gut feeling agrees with the ARM. With that big of a spread going fixed it will take awhile for it to be a loser - esp. if you see getting out in 3 years or so.

It has been going up, but it's a fairly slow Index. just up to 5.5% Your rate should be 6% at initiation.

rjp

lendaddy · 02-11-2005, 07:36 AM

Quote:

Originally posted by RANDY P

It has been going up, but it's a fairly slow Index. just up to 5.5% Your rate should be 6% at initiation.

rjp

You are correct, I was ballparking. I'm sure 6.5% is only one Fed meeting away though