Posted on 05/23/2004 1:22:06 PM PDT by inquest
OK, hopefully some financially knowledgable Freepers will show up to this thread to help me understand this, because I make no pretensions to being a guru (or even a journeyman) on this kind of stuff.
Why in tarnation would Greenspan recommend, at a time when interest rates (from what I hear) are at historic lows, that people switch to adjustable-rate mortgages? It makes absolutely no sense to me. Does anyone out there seriously think this would be good advice?
Anyone who was around when rates hit 17% would not be dumb enough to use an adjustable rate mortgage unless they have a specific and good reason to do so (a slightly lower rate isn't a good enough reason)..
The article answers that.
People are paying higher rates than they need to.
Lots of people have sat on locked rates while rates were both low and stable. That means they have paid extra for security they would have had anyway.
It also makes no sense to lock in for 30 years on a loan you are going to refinance or sell out of in 5-7 years max.
But what are the chances that rates are going to be lower than they are now over the next several years?
Let me say that I don't know what I'm talking about, but your comment makes sense. I would rather sit on a fixed rate at a historically low interest, rather than ride the adjustable rate seesaw.
I don't trust Greenspan.
Adjustable rate mortgages are a good deal for people who know they're going to want to move in 5-7 years. A fair number of people fall into that category - military, people in a career path for a National company, people buying a "starter home", etc.
Why would anyone consider anything Greenspan has to say! The man is a senile old fool.
Slim.
But what are the chances a mortgage will go up more than the difference between the fixed and variable rates? And you have to look at the average paid over the life of the loan.
30-year fixes are penny wise and pound foolish for most people.
That's the point. Even if rates do go up, if you are only in a mortgage for 3 years, an adjustable is cheaper. There are numerous adjustable rate options, many only adjust after 3 or 5 years. These 3 or 5 year adjustable rates are always a point or two lower than fixed rates. So in essense they are 'fixed' for 3 or 5 years, and the adjustments are capped. Even with MAXIMUM rate adjustments, with a 3 year adjustable the total interest will be less during the first five years.
b) The perceived increase in inflation is really a function of the lower dollar. Worldwide, there is still manufacturing overcapacity, and the the world-wide cycle is still deflationary. Ergo, any economic recovery is not going to overheat, and any upward pressure on short rates will not be long-lasting, until the world-wide deflationary cycle is over.
"Anyone who was around when rates hit 17% would not be dumb enough to use an adjustable rate mortgage unless they have a specific
Be careful who you're calling dumb.
c) Today's adjustable mortgages have caps, usually 6%, so a 3½% adjustable can never go over 9½%. So do you prefer to pay a fixed 6%, or fluctuate between 3½ and 9½? NOw remember, the fluctuating rate that you pay is usually going to be about 2+ points below prevailig long rates. The fluctuation gives you the ability of paying more equity down when rates are low, which can quickly speed up the pay down on the mortgage.
Japan has had negative interest rates and that nation has continued to remain sluggish for years. Maybe Greenspan forecasts the U.S. is in for a "similar" period. Maybe he is indicating Americans should avoid locking in fixed rates (on the assumption rates will "rise"), any time soon.
In Los Angeles, many homeowners now have flexible, ARMs. But, if int. rates do rise -- they are screwed. Esp with the huge mortgage loans most people out here carry, given the extreme home prices. A fixed rate in this context (if you plan to keep your house for a while) seems prudent. So, could Greenspan therefore be thinking that we (in the US) are in for a long period - with low rates???
Greater than slim, I'd say. And included in that are the chances that they'll go way up, in which case you'd be screwed, even if you're only planning on staying a relatively short time.
Still, I understand the argument for going with ARMs for short stays, but I don't think Greenspan was limiting his advice to those individuals. (unfortunately I don't have the full text of his address)
Reading that report, it seems that he does mean for some people.
And the fact is, people have been paying 2% or more than they needed to if they refinanced a few years ago. And for that extra 2%, they got nothing.
Save a few FRN's now and risk much higher rates later? I don't think so! Greenspan talks for hours and doesn't say $hit. I would do exactly the opposite of what this ossified old fool says.
Not true at all. Most people don't stay in a home for 10 years. Anybody that stays in a home less than 5 years, will always be better with a 3 or 5 year adjustable. Now a 1 year adjustable is risky unless you know you are moving within two or three years.
"Why in tarnation would Greenspan recommend, at a time when interest rates (from what I hear) are at historic lows, that people switch to adjustable-rate mortgages?"
Someone called in to Bob Brinker's program yesterday asking basically this same question. Say what you will about Brinker, but I think he DOES know finances most of the time. He is absolutely against adjustable-rate mortgages; I think he said because rates are still so low, lock one in now.
And yes, I can remember when the rate was actually 17%
or higher; we had been in our home for several years and our 6% interest rate WAS kind of embarrassing! I think the high interest rates were part of the reason Carter didn't get a second term.
If rates go up with lots of bank capital locked into low-interest real-estate loans, the banks are screwed
In reality, one must consider many factors when doing an economic analysis like this. How long you plan to own your home; Your job security; Your tax bracket; Your best guess at the real estate market in your area; What would happen if you lost your job.
There is no doubt in my mind that inflation will go up in the U.S. and pretty soon. If it were me, I would go fixed rate. But then WTFDIK...
You just agreed with my point.
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