Question:
“I read in the paper Sunday that with rates having gone up, people are starting to consider adjustable mortgages. What do you think?”
Answer:
With our still historically low interest rates, getting an adjustable mortgage would be bad advice for most people.
No one can predict the future, let alone the direction of interest rates. However, the consensus is that rates are on the way up for many reasons, including:
#1 – The Fed Will Buy Less Mortgage Backed Securities
Rates are being held down by the Federal Reserve buying most mortgage-backed securities (in essence, mortgages). By artificially creating more demand for mortgages, this allows the return (interest rate) to be lower. However, Fed chairman Ben Bernanke has clearly stated that these purchases will taper off in the next year or two.
#2 – Printing Money Is Inflationary
The government has printed and pumped a huge amount of money into the economy to prop it up. As the economy improves, having all this money is inflationary. And inflation causes interest rates to go up.
#3 – Inflation Would Decrease Our Crushing National Debt
The federal government is $17T in debt. Inflation decreases the value of the dollar, which in effect would make that debt smaller. So there is an incentive for the government to allow some inflation. And, again, inflation tends to push up interest rates.
So because most indicators point to a mid- and long-term trend for rates to go up, better to lock in the lower rate now.
There are a few exceptions. Two that come to mind are:
- It can be very expensive and/or almost impossible to get a fixed rate on higher balance mortgages
- For some specific situations, people may not be able to get a fixed rate or the correctly structured adjustable would be better. But I submit that this is a low % of people.
My advice? If you haven’t guessed already: Get a fixed rate!
