Wow-

You had my attention with one of the first lines:

"that Wall Street gurus are wrong over 60% of the time with their interest rate projections"

It takes some serious effort to be wrong that much!  If you had no inside info and you just guessed you'd have a 50-50 chance!

It's like they're TRYING to be wrong!!!

(yes,a bit of an over simplification but you know what I mean!)

It does seem like they purposefully try to be incorrect.  Markets shift so quickly that long-term interest rate prognostications are almost impossible. That's why the annual ARM insures that you'll always be on the right side of the market.

Brian,

One of my best financial decisions was my arm in 1989. It even had that horrible negative amortization. I watched all my friends refinance at 9% then 8% then 7%.then 6%  Mine just kept going down and down and down from $2000 a month to $700. a month.

Some wall street genius on my buildings board refinanced our underlying mortgage at 8% with a huge pre payment penalty. So we're stuck at 8%

My clients are more conservative than me. They all want 30 year fixed.

It's an education process, Mitch.  Use your building loan and your personal loan as examples of what TO do

Brian,

Awesome post.  I would add that the LIBOR tracks closely to the Fed Rate and since the Feds typically overshoot their rate, we can look forward to lower interest rates tied to these indexes most likely. 

That's very true.  An ARM today makes more sense noe than it has these past 2-3 years.

I learned how to overcome the bias for the 30 year fixed 20 years ago when I got my first amortization program on my computer.  Just show them the numbers. 

The average time in a home in my area is 2.5 years and Daddy says they have to have a 30 year fixed loan????  Oh, and a brick home too. 

Shucks, let me know that young couple a new or newer home with a 1-3 year ARM and I've just made a sale.

Thanks.  Good info.  I'll pass it around to my agents.

I love the comment about what Daddy says. 

I don't have any data going back that far, K.

Thanks for the comments, Ken and Tom.  Logic is low on the list, isn't it?

This could be the first five year period (2003-2008) where the history does not ring true.  However, capturing the absolute bottom of a 45 year market is sheer dumb luck.  Considering that the average hold for a mortgage is 3-5 years, you're almost always better off in an annual ARM., especially in this inverted yield curve market.

Getting past the psychological barriers in a client's mind?  You're comment is dead on; it's an education process.  All we can do is show them the facts and let them decide.  I am, however, passionate about educating clients to make decisions based on critical thinking. 

Good comments and welcome to Active Rain! 

Funny stuff, Suzanne.  It illustrates how mortgages are not just a commodity.

Ron:  We've all made a LEG loan or two.  Sometimes they work, sometimes they don't. 

John Novak:

That is a great question.  No, the ARM adjusts to the market rate every 12 months.  There are no closing costs associated with an annual rate adjustment .  I'm glad someone asked that question because many probably thought it.

Ken:

You are dead on.  It seems that those who want the ARMs are the ones that shouldn't have them. 

I think if you practice the old qualifying practice of start rate plus 1% for qualifying, you can determine ability to repay easier.

You know, some of these old-school underwriting methods don't look so "antiquated" now, do they?