Hedging strategy against variable-rate mortgage?

We all know that variable-rate home mortgage usually offers a lower rate than than the fixed-rate one (if compared at the same moment in time). Does it work for an average home buyer to do the following: borrow at a variable (lower) rate, and use a hedging strategy, such as buying a T-note futures or options (or any other market instrument of the interest-rate markets) ? Simply put, the idea is this: we use low mortgage rate, and if it goes up later, we will lose on the higher mortgage payment, but our investment in the interest-rate market will also go up, so we will gain a similar amount to offset the rise of mortgage payments.

I know, large corporate land and real estate owners and maybe home builder companies do that, but does the same approach work to save money for individual home-buyer?

If you have knowledge in this field, please let me know which instrument can I buy (or short) for such hedging?

The interest-rate instrument (stock/futures/options) used here needs to meet 2 criteria: large leverage, small per-share price (because of the need to sell it little-by-little as I keep paying off and reducing the outstanding mortgage size). Thanks!

The theory of hedging you describe is used by the pros as a matter of course.

However, what works for insitutional investors does not necessairly work for the average joe.

The problem with your plan is that when your ARM goes up, the payment goes up, ie you are out more cash on a monthly basis. Your T-bill provides no such additional monthly income. You would want to put the extra cash into an investment vehicle which pay a dividend as rates rose. You could pick any dividend paying stock for example.

Better still would be to put the money in a savings account which earned interest and withdrew money as needed.

If your 5% ARM goes up to 8%, that 3% difference is hedged by the savings or money market account.

You can do it with T-Bills, but a money market or CD is prolly easier and provides the same protection.

**Reply**

No, you only need enough cash to offset rate increases on a per month basis. So if you need an extra 100.00 per month, then you would set aside an appropriate amount. Ok, so here's why I suddenly got real vague...I'm lazy. The real amount you need will depend on the number of adjustment periods you face in a year. You would also have to guess at the interest rate changes (typically an ARM has a ceiling, I would use that). Now calculate the Future value and adjust for inflation. Now you know how much you need. Again, rates and adjustment periods will vary so the math will get tricky and fast (and I'm too lazy to make an excel sheet for it).

At this point you might be thinking its not worth it. And you're right. Get a flat 30 month loan and forget gaming interest rates and trying to guess how much you need to squirrel away annually to hedge rate increases.

My .02