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Adjustable or Fixed Rate: Which One Should You Choose?

With all of the media reports about how bad ARMs and exotic mortgages are, you would first jump to the conclusion that Fixed Rate Mortgages (FRMs) are clearly the better deal. I am sure you have seen the reports of the subprime woes and how many families have been forced into foreclosure due to these types of loans either resetting or recasting. With all of the bad news out there, how could ARMs possibly be worthwhile?

The answer may surprise you. ARMs and exotic mortgages, including the Option ARMs (you know, the ones that everyone hate now), do have their benefits and they may be the best choice for you. The bottom line is that the answer to the question truly depends on your unique situation.

So, let's look at some facts. The average homeowner only keeps their mortgage for about 4 1/2 years and rarely stays in their home longer than 7 years these days. This is where ARMs truly benefit the homeowner, offering lower interest rates that are fixed for up to 10 years. Granted, with the yield curve remaining relatively flat, their benefits are not as good as they could be and current pricing on a 10/1 ARM is really not any better than a 30 Year Fixed.. Still, from a net worth standpoint, 5 years from now, based on today's rates, a homeowner who opts for a 5/1 ARM over a 30 Year Fixed and uses IO on both of them, will be ahead by thousands of dollars. As the yield curve returns to a more normal pattern, ARMs will offer better benefits as the interest rate spreads will be greater.

Continued here...

Addendum (on other site as a seperate post)...

In the recent post of assisting homeowners in choosing which type of loan is right for them, I left out some other benefits ARMs could provide. You see, everyone seems to focus on the negatives, especially when it comes to the media today. They all seem to be focused on how the payments are going up and forcing families out of their homes.

But what about the other side? Adjustable Rate Mortgages can adjust downward as well and did in fact go down a few years ago. Did everyone forget that already?

Since interest rates run in cycles like everything else in this economy, they will go down and may even go down before your ARM comes due for an adjustment. So, while everyone is saying to run and get a fixed rate mortgage, you may want to rethink that step and go and get an ARM instead.

Just look at investments, real estate or otherwise. Whenever the herd (media especially) get focused and preach to do something, that is usually when the end of that cycle is over. Rush into the stock market, you can't lose. That is what they were saying right up until the "bubble" burst. Everyone was saying to "flip"this house, or that one, and what happened? Those flips were quickly becoming flops.

So, not that this will happen by the time your ARM would adjust, you do need to realize that the cycle may be moving the other direction soon, especially now that the herd is saying those ARMs will adjust higher.

Posted by Florida's #1 Mortgage Planner on 07/27/2007 03:24 PM

Comments (12)

arm, frm, fixed rate mortgage, adjustable rate mortgage, florida mortgage, mortgage rates, interest rates

Post is included in group: Carnival of Content - Loan Officers/Mortgage Lenders

12 Comments on Adjustable or Fixed Rate: Which One Should You Choose?

JUL

2007

Robert - I rarely do this but I'm clicking on the link. I really want to read your thoughts.

Jason...Thanks for clicking over to the "other side". I am trying to do more with both AR and that site, so I thought i would try this link thing. I actually originally posted the entire thing here, then went back to cut out part and provide the link. I welcome feedback from readers as to whether or not they like this way or if it takes away from the posts.

Robert, Bravo for standing up for what you believe is right! Everything changes and if people are not aware of that fact they get hurt! There are many waves and they have to be ridden out until they are done. Then you find the next one!

Robert, Thanks a lot!! I thought I was at least in the %... Then I just read yours and you blew me off the map. :-) Great post.. (by the way it my book it is a 5)

Robert,

I followed Jason, had to click on the link, I liked that you mentioned how long someone usually spends in a home, as well as how arm can go down too!! we don't hear that often.. but it does happen.

Nice ,

Tom Weiss

Robert, it is amazing how people will listen to some reporter who does not have a clue of what he or she is talking about, but not to the professionals who do this everyday.

JUL

2007

Rey...The waves actually should not be ridden out until they are done, you should get off the wave when it is just about done. There are many waves and the trick is to find one that is just building and ride it to just prior to the top. That is where you will make the most money.

Matt...Thanks for the 5. I have yet to go around reading everyone's posts, but I am sure several were better. I will be reading them all this weekend, and I look forward to seeing yours.

Thomas...I am glad you liked that part. People need to realize that cycles go up and down. Focusing only on the upside risk is not providing a clear picture. The benefits of adjustments hitting on a down cycle can provide even greater benefits.

George...If I watched the news all day and paid attention to them, I would be convinced the world was ending tomorrow. Who cares if there is a lot of "negativity" in the industry today? The truth is tomorrow (well a little further out) will be a brighter day.

Robert.... I know Jason doesn't like clicking over to links. I don't mind, but in a contest, I don't think it's a good idea to put part of your topic in another blog and on another site. Just my .02, because you stritcly want to keep that person's attention here. Unlike just regular posts, while trying to get more notice and more traffic to the other site, I think this is different.

In any case.... you make your point well and quick. So many loan officers don't know or forget to remember that there is a cycle, that about every 4 to 5 years, rates go up or down. This is not rocket science. And I agree about the 10 yr arm... this type of product was only good for a few years after it came out. Since then, it was just so so... my main product 5 to 6 years ago was placing clients in the 7 yr balloon. Back then, rates were about a whole 1% less. So strong of a program and I was laughed by many loan officers and higher ups when doing this. SAD....

In any case... some good content on how the rates work and when arms can be very good.

jeff belonger

Interesting point--I almost never think of an adjustable going down.

JUL

2007

Jeff...Thanks for providing feedback. I put this whole post together in a matter of about 15 or 20 minutes as I didn't realize the contest ended Friday night and I was going to work on it yesterday. That is the reason for the "addendum". As I reread it, I realized that I omitted those facts and needed to add them, but did not have the time to rewrite the whole thing. I agree with your point about having them go to the other site in a contest format. Again, thanks for the input. I will be rewriting this for the consumers benefit in the coming days.

Thanks also for the compliments. I think a 5/1 is a good option right now as rates will likely be heading down by then, although they may inch up a little more. Also, the Yield Curve will likely return to a more normal pattern and ARMs will be even more valuable.

Diane...Unfortunately, as has been mentioned in other posts, the media is against these products right now and there are many mortgage (lack of) professionals that just sell what the media is persuading people to buy. They get the loan that way, but have no real expertise and knowledge of how the mortgage market works or which program is best for the client's situation.

Robert, I especially liked your point about the media. They do tend to run along after trends rather than forecast them. Flips are flopping all over!

JUL

2007

Sarah...Thanks for stopping by. I watch TV news and read the occassional paper only to see what the media is saying and what I need to do to truly educate the consumer. The media is kind of like the stockbroker in the sense that they generally recommend the latest "fad" without truly understanding the benefits of other options or the cons associated with the latest "fad".

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