Would you take 3% with 7yr balloon or 2.75% with 5 yr balloon?

Question

If you had to make a decision in the current market, would you take 3% with 7yr balloon or 2.75% with 5 yr balloon? On a 20 yr amortization. What is your reasoning?

Account Closed · Answer

@Jason J.  This is a nuanced response, but I’m doing a 7-yr lock on a commercial loan with the first 12 months being a HELOC.  So, I’m only borrowing what I need in that first year and that gets locked in for the remaining 6 years.  I also have the option of converting the commercial loan to a residential loan (with the same lender/bank) and any prepayment penalty is waived.  We’re without W-2 income, so this was a nice option for us.

Just mentioning in case anything applies to your situation.

Brian G. · Answer

@Jason J. .25% lower rate vs 2 extra years locked? Personally I would go with the 7 year lock as .25% lower rate doesn’t move the needle whereas 2 extra years to figure out your next step on that loan could be very impactful to the investment.

Terri Wyzkoski · Answer

Jason, we're in a rising-interest-rate environment. Take the longest low-interest rate (7-year) you can get.  However, negotiate the prepayment such that there is NO PREPAYMENT unless you refinance with another lender.  Most lenders will be okay with this.  I'm a 29-year veteran lender, and I'd be okay with this.

BTW, would you be amenable to PM'ing me with the lender who's offering you such a low interest rate?  I'd like to add them to my funding source network.

Nick Robinson · Answer

@Jason J.Without knowing any prepayment penalties or anything else about the loans I would take the 7yr.  My reasoning is currently in this market there is a lot of uncertainty and there is a greater downside risk to prices right now.  The Eurodollar Futures, US Dollar outside of US, inverted early December which is projecting lower economic activity worldwide in the future.  You basically look at it the way you would look at the US bond market yield curve inverting.  Speaking of the US yield curve it has become increasing flat which is showing the market believes we have a weak/something is wrong with the economy.  If the FED stays with their stance to raise FED funds rate in March and have 7 total hikes this year, I would project we would see a yield curve inversion.  Thats important because it is over a 90% chance that we will have a recession in the next 14months, if that happens.  Every recession since 1900 has been preceded by a yield curve inversion and every yield curve inversion has been followed by a recession.  Out of all the recessions since 1900 just under two thirds of them have come with a real estate crash. I want to minimize my downside risk as much as possible.  Watch the 2yr and 10yrbonds.

Greg V. · Answer

I’d watch out for the prepayment penalty if you have one.  If they’re the same and end in 5 years then no big deal.  If the 7 year loan goes to 7 years prepayment penalty that can be a big cost to refinance at 5 if that is a possibility.

Vincent Galante · Answer

@Jason J. I would do the 7 year. The interest is still so low at 3%.

.25% isn’t going to make that big of a difference over the 7 years. Also, you will more than likely be re financing at a higher rate weather it’s in 5 years or 7. I say keep that low rate for 7 it’ll pay down more principal and you won’t miss the little bit of money you would have saved by saving the .25%.

Richard B. · Answer

@Jason J.  Both rates are super cheap!

I’d lock in the 7 year rate and if  it was better for me,  pay it early

Greg V. · Answer

So for me, I tend to cash out refinance at 5 years anyway to pull money out and buy another property.  5 years has been a good time with enough equity pay down and appreciation where it makes sense.  It depends where you think the market, and interest rates are going and also depends on your future plans to refinance.

Jade S. · Answer

I’ve stuck with the longer term more recently.  My hold time expected to be 7+ years, and the risk of interest rates being higher at 5 years helped me make that decision.  And any pre-payment penalties will burn off before year 5 in any event.

Would you take 3% with 7yr balloon or 2.75% with 5 yr balloon?

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