How to Hedge Your Mortgage

In today's market, the interest rate for 30-year fixed mortgages is about 5 percent. Since this rate is near historic lows, many mortgage brokers and financial analysts expect this number to rise over time. If you are worried about increasing interest rates, there are hedging strategies you can take to decrease the financial hit if the interest rate on your mortgage increases.

Instructions

How to Hedge Your Mortgage

1

The simplest way to hedge against future rate increases is to get a fixed-rate, 30-year mortgage. Fixed rate mortgages lock in the current interest rate and last for 30 years, although they can be paid off faster.

2

Buying a targeted ETF, or exchange-traded fund, will help you hedge your mortgage. By buying an ETF that increases in value as rates rise, such as the ProShares UltraShort 7-10 Year Treasury Fund, you wlll minimize the hit you will take if interests rates rise. If you don't need a mortgage now, but want to hedge against the future interest rates, buying a PST in the short run and then selling it to pay for your downpayment is a popular strategy.

3

There are a wide variety of secondary market instruments that trade based on the changing values of interest rates. As you want to hedge on the changing future value of interest rates, the proper derivative to buy is a future. Currently, the most popular mortgage hedging future is the Eurodollar future, which is based on the LIBOR interest rate. If the LIBOR goes up by 1 percent, and your mortgage goes up by 1 percent, the Eurodollar future increases in value by $2,500. This means you need one Eurodollar future for every $250,000 of value your mortgage has to fully hedge per year. A $750,000 mortgage for 2 years would require 6 Eurodollar futures, 3 for each year.