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Are Interest Rates Going Bizerk

March 3rd, 2008 6:16 PM

Are Interest Rates Going Bizerk???

By: Nino Brown (asknino@asnffinancial.com)

Are interest rates really going out of control? Yes, they are; but this is a good thing for borrowers and home owners. You must be thinking how can this be…Well interest rates are going down substantially. Over the last 12 months rates have drop by over two points. So remember those horror stories about those adjustable rate mortgages causing people to loose their homes. Well, those same mortgages that doubled in previous years will be cut in half by years end. Pretty funny how no one is talking about how these ARMs are going to save people’s homes; instead congress focuses on the negative. That is probably because banks stand to make billions of dollars by refinancing homeowners into fixed rate mortgages which now have higher interest rates than the “dreaded” adjustable rate mortgages.

Adjustable mortgages have there place. I have one, my first two years I enjoyed a 3-4% rate. However, for the last 4 years I have seen it double causing me a little discomfort. But now for the next 2-4 years I will see my mortgage get cut in half saving me thousands. At the end of the day, people need to hold themselves responsible for the “investment” choices they make. Yes, a mortgage is an investment. You must have the understanding that with an ARM you can save tons of money now, but you have the potential to loose thousands if rates rise. So what philosophy should you take when getting a mortgage? Below are a couple:

1) Can you afford an ARM if rates start to rise:

This is the most important question. Do not get an ARM if you are living on a fixed income or if you do not expect your salary to increase over the next couple of years. When I first bought my home I knew that my salary would increase substantially every year, therefore, I could afford my mortgage if rates increase. Please be realistic with yourself, if you are a school teacher an ARM may not be suited for you!

2) How long do you expect to own your home:

If you expect to be in your home a short time (first time homebuyers), then you should consider an ARM. If rates are currently low, take advantage of the cheaper monthly payment because you plan to sell and buy a new home within 3-5years. Therefore, when rates adjust upward you will not be affected because you plan to sell your home; thus, the adjustable rate mortgage will be paid off.

Simply put ARMs have their place in many individuals financial portfolio. They are a key investment and cash management tool that can enable you to free up some necessary cash to start other endeavors.

Posted by Nino Brown on March 3rd, 2008 6:16 PMPost a Comment (0)