Our mortgage rate expires in eight days, which means we had to decide what new rate we wanted to lock in. The options ranged from 18 months to 5 years, with a range of about 50 basis points.
This isn’t my first time doing this, and my approach is always the same: look at the odds and magnitude of any potential upside, and then do the same for the downside. Or in other words, what are the odds that something good happens, and how good will that thing be, and vice versa.
When I look at interest rates for our mortgage, I tilt conservatively. In my eyes, the chance of an interest rate drop is semi-likely, but hard to predict when, and most likely minor, maybe 25 bps at most. So the maximum upside we could get is an extra $1k or so a year; nice to have, but not life-changing.
By going for a longer term approach, we lose 4bps, but hedge ourselves against any blowouts. Interest rates can only go to zero, but can theoretically go up forever.
At the end of the day, we’re happy with the price, and we’re only wasting our time thinking about what-if.
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