Sam, I’m a faithful reader and agree with most of your posts, but I really think this topic needs more balance on your blog. By the way, I would have been super annoyed by the ignorant response of that “mortgage specialist” too! While ARMs might make sense for many people, I don’t think you give the fixed-rate mortgage (FRM) the credit it’s due. My argument is below, but first, in a feeble attempt to give my argument some more weight, here are my credentials: 1) I have worked in bond markets and housing finance for 11 years (NOT for a mortgage broker or lender), 2) I was an Econ major in undergrad and have a MBA 3) I have refinanced, 4) my job requires me to follow interest rates real-time, and I read financial history for fun, so I can tell you where a lot of markets were 10, 20, 30 years ago 5) I am a homeowner, 6) I don’t make any money from people going into a FRM versus an ARM.

Here are seven reasons why FRMs can be a great product for today’s borrowers:

1) The obvious one: the FRM provides payment certainty and stability. This can help with consumer budgeting and can reduce the likelihood of default through payment shocks. A rate increase from 2.625% to the 7.25% ARM cap may not be “very digestible” for the average American family! Let’s say Johnny Risk has a $200,000 mortgage balance with a 2.625% rate. His monthly payment is $803Lucknow Stock. At year 5, his rate resets to 7.25%, which increases his monthly payment by 60% to $1,277. The $473 payment increase equates to ~15% of his after-tax income (assuming he makes $50,000/yr). Just like your example, his principal is down 10% after 5 years, but it’s hardly a “whoopdee doo” scenario for Johnny.Surat Investment

2) While ARM borrowers have done much better since the 1980s, the 30-year FRM borrowers who locked rates in the 1950s were better off. The Federal Funds increased from 1% in the mid-1950s to 19% by the early 1980s. No one can predict exactly what interest rates will do in the future. However, the longer the Federal Reserve remains accommodative (keeps rates lower), the higher the likelihood of higher rates in the future. In a more normal economy, the Federal Reserve forecasts rates to rise by 2-4%. If rates rocket even higher because of a stronger economy, you’ll be celebrating even more with a 30-year FRM. The FRM is a nice inflation hedge

3) As you know, the yield curve is not always upward slowing. In 2000 and 2005, it inverted, which usually happens when the Fed raises rates. So, borrowing on the long-end is not always a suboptimal use of funds.

4) To your point about mortgage officers pushing people to get as long a fixed rate mortgage as possible. Lenders actually charge higher margin on ARMs, meaning they make more on them. Part of the housing boom leading up to 2007 was due to lenders pushing tons of people into ARMS. In 2006, ARMs made up ~25% of mortgage applications compared to 7% today. I do think there is some truth to lenders pushing more fixed rate product today, but that’s because the FRMs are simpler to originate than ARMs. Also, if bankers/lenders find FRMs so profitable, why are almost all FRMs (over 80% of origination) sold to and backed by the government or government sponsored enterprises like Fannie Mae and Freddie Mac? The government subsidizes that FRM rate.

5) The FRM borrower has protection against lower rates because he/she can refinance into a lower rate with no pre-payment penalty. Yes, I know it’s not an entirely free option (due to closing costs), but you should be able to take advantage of lower rates if you’re financially responsible and keep 3-6 months’ worth of expenses in your bank account. With an ARM, there is no protection against higher rates.Chennai Stock

6) Long-term interest rates are at all-time lows. Sophisticated CFOs at firms like Apple and AT&T are taking advantage of the borrowing at low long-term rates. Why shouldn’t youBangalore Wealth Management?