7 ms·

Fixed rate is the standard in the US. If someone here gets an adjustable rate, I usually assume they are financially illiterate.

senthil_rajasek 4y ago
Between 2009 and 2021 ( low and decreasing interest rate regimes) ARM 3,5 or 7 year were a better choice to fixed rate mortgages. ARMs are not a bad choice if you know what you are doing. It is also a great choice if you are not planning to stay at a place for all your life.
- InTheArena 4y ago
  But 2007/2008 drove a number of people w/ these mortgages into bankruptcy. It's a risk thing.
  - senthil_rajasek 4y ago
    The 2007 housing crisis was primarily a subprime mortgage crisis. ARMs are not the devil just as CDOs aren't the villain.
ct0 4y ago
And extremely optimistic.
bluGill 4y ago
I wouldn't say illiterate. If rates are going down they are a great choice as you will refinance in a couple years anyway. However you have to really know what rates (read the economy) will do so that just as they reach the bottom (you don't need to hit the exact bottom, just get close) to refinance to fixed rate. They are also good if you have reason to believe you won't live there for more than a couple years. (in general renting is better than buying if your time frame is less than 7-10 years, but local factors may force you to buy anyway). Since ARMs are lower rates they save you money in the short run. However they tend to adjust up after the terms and so can really hurt you.
- eric-hu 4y ago
  One more specific example of someone taking a calculated short term risk: home flippers. They have had both good times and bad in the last 15 years. Those who financed with lower costs during hotter markets had better margins.
  - KerrAvon 4y ago
    House flipping should probably be banned, though. It's bad for the homeowners who buy the house because it's invariably low-quality contractors who do the work and they invariably don't do it to code. It's bad for the neighborhood because the residents aren't stable.
    - kortilla 4y ago
      This is a dumb over generalization. People that fix up homes are good for the neighborhood.
    - aperson_hello 4y ago
      I'm curious what the alternative is? Houses in bad condition are even worse for the neighborhood
- DontchaKnowit 4y ago
  Ignorant here because I dont know how ARMs are actually structured as far as what the lender can and cant do, but the idea of signing a loan contract and having no garauntee of the upper bound of the interest rate is absolutely wild to me. Banks will fuck you at any opportunity they have, so habding then a loaded gun and thinking theyre not gonna raise rates without a reason is crazy to me.
  - svachalek 4y ago
    Even if there were no limitations in the contract, there's still a market. If your bank diverged too far you can just refinance. And if the whole market is high, inflation is probably crazy and you're watching the principal dwindle to insignificance anyway.
rfrey 4y ago
Why? When I looked into it (about a decade ago), variable rates had paid less overall than fixed for every 10 year window over the previous 50 years. I always assumed people getting fixed rate were overleveraged and couldn't assume the rational risk of the variable.
abrookewood 4y ago
Funny, cause I think the exact opposite. I've read numerous papers and in Australia at least, you are statistically better off on a variable rate something like 2/3 of the time. You pay a premium for the security of a stable interest rate.
- irrational 4y ago
  My interest rate is fixed at 2.2%. It seems highly unlikely that interests rates are going to drop below 2% for a significant amount of time.
- thfuran 4y ago
  You can also (probably) save money by never buying any kind of insurance, but insurance is a useful risk mitigation. Someone who got an ARM a few years ago and is hitting the variable rates around now probably sees their interest rate roughly double. They likely aren't much reassured by the fact that historically, most people's mortgages had better timing.
coolestguy 4y ago
Banks set the fixed rate & they more than anyone else knows what will most likely happen to rates in the future because the banks are the ones in closed door meetings with reserve banks/government. Do you think they'd set a fixed rate where they lose?
hiAndrewQuinn 4y ago
Yale economist James Choi certainly doesn't strike me as financially illiterate, yet in his paper "Popular Personal Financial Advice versus the Professors", he finds variable rate mortgages to be a pretty good deal. https://www.nber.org/papers/w30395 https://www.nber.org/papers/w30395
benjaminwootton 4y ago
In the UK, a large percentage of mortgages are variable rate. And they almost all have the early repayment penalty.
- elteto 4y ago
  Early repayment penalty? That’s fucked. For once, I’m happy to see the US leading in this regard.
lawn 4y ago
Your statement makes me assume you're financially illiterate... A variable rate has historically been more beneficial than a fixed rate. A fixed rate should be seen as an insurance you pay a premium for. If the risk of it going up so much that you can't afford it, then it's absolutely a great idea to get a fixed rate, but otherwise you'll earn more with a variable rate.
- astura 4y ago
  Depends on what the rate is. If it's historically low at the time your take out your mortgage you might consider locking in that rate. I certainly would not have been better off with a variable rate, for one example.
- aperson_hello 4y ago
  Statistically, you're right - the variable rate is usually better. But that's also assuming that interest rates are completely random (which they're not) - a bit of market timing is wise to do here. And the spread compresses when rates are low, making the fixed more attractive then because the premium is lower. Variable also makes a lot more sense with shorter timelines (either to sale or to early payoff).

senthil_rajasek 4y ago

Between 2009 and 2021 ( low and decreasing interest rate regimes) ARM 3,5 or 7 year were a better choice to fixed rate mortgages. ARMs are not a bad choice if you know what you are doing. It is also a great choice if you are not planning to stay at a place for all your life.

InTheArena 4y ago
But 2007/2008 drove a number of people w/ these mortgages into bankruptcy. It's a risk thing.
- senthil_rajasek 4y ago
  The 2007 housing crisis was primarily a subprime mortgage crisis. ARMs are not the devil just as CDOs aren't the villain.

ct0 4y ago

And extremely optimistic.

bluGill 4y ago

I wouldn't say illiterate. If rates are going down they are a great choice as you will refinance in a couple years anyway. However you have to really know what rates (read the economy) will do so that just as they reach the bottom (you don't need to hit the exact bottom, just get close) to refinance to fixed rate. They are also good if you have reason to believe you won't live there for more than a couple years. (in general renting is better than buying if your time frame is less than 7-10 years, but local factors may force you to buy anyway). Since ARMs are lower rates they save you money in the short run. However they tend to adjust up after the terms and so can really hurt you.

eric-hu 4y ago
One more specific example of someone taking a calculated short term risk: home flippers. They have had both good times and bad in the last 15 years. Those who financed with lower costs during hotter markets had better margins.
- KerrAvon 4y ago
  House flipping should probably be banned, though. It's bad for the homeowners who buy the house because it's invariably low-quality contractors who do the work and they invariably don't do it to code. It's bad for the neighborhood because the residents aren't stable.
  - kortilla 4y ago
    This is a dumb over generalization. People that fix up homes are good for the neighborhood.
  - aperson_hello 4y ago
    I'm curious what the alternative is? Houses in bad condition are even worse for the neighborhood
DontchaKnowit 4y ago
Ignorant here because I dont know how ARMs are actually structured as far as what the lender can and cant do, but the idea of signing a loan contract and having no garauntee of the upper bound of the interest rate is absolutely wild to me. Banks will fuck you at any opportunity they have, so habding then a loaded gun and thinking theyre not gonna raise rates without a reason is crazy to me.
- svachalek 4y ago
  Even if there were no limitations in the contract, there's still a market. If your bank diverged too far you can just refinance. And if the whole market is high, inflation is probably crazy and you're watching the principal dwindle to insignificance anyway.

rfrey 4y ago

Why? When I looked into it (about a decade ago), variable rates had paid less overall than fixed for every 10 year window over the previous 50 years. I always assumed people getting fixed rate were overleveraged and couldn't assume the rational risk of the variable.

abrookewood 4y ago

Funny, cause I think the exact opposite. I've read numerous papers and in Australia at least, you are statistically better off on a variable rate something like 2/3 of the time. You pay a premium for the security of a stable interest rate.

irrational 4y ago
My interest rate is fixed at 2.2%. It seems highly unlikely that interests rates are going to drop below 2% for a significant amount of time.
thfuran 4y ago
You can also (probably) save money by never buying any kind of insurance, but insurance is a useful risk mitigation. Someone who got an ARM a few years ago and is hitting the variable rates around now probably sees their interest rate roughly double. They likely aren't much reassured by the fact that historically, most people's mortgages had better timing.

coolestguy 4y ago

Banks set the fixed rate & they more than anyone else knows what will most likely happen to rates in the future because the banks are the ones in closed door meetings with reserve banks/government. Do you think they'd set a fixed rate where they lose?

hiAndrewQuinn 4y ago

Yale economist James Choi certainly doesn't strike me as financially illiterate, yet in his paper "Popular Personal Financial Advice versus the Professors", he finds variable rate mortgages to be a pretty good deal. https://www.nber.org/papers/w30395 https://www.nber.org/papers/w30395

benjaminwootton 4y ago

In the UK, a large percentage of mortgages are variable rate. And they almost all have the early repayment penalty.

elteto 4y ago
Early repayment penalty? That’s fucked. For once, I’m happy to see the US leading in this regard.

lawn 4y ago

Your statement makes me assume you're financially illiterate... A variable rate has historically been more beneficial than a fixed rate. A fixed rate should be seen as an insurance you pay a premium for. If the risk of it going up so much that you can't afford it, then it's absolutely a great idea to get a fixed rate, but otherwise you'll earn more with a variable rate.

astura 4y ago
Depends on what the rate is. If it's historically low at the time your take out your mortgage you might consider locking in that rate. I certainly would not have been better off with a variable rate, for one example.
aperson_hello 4y ago
Statistically, you're right - the variable rate is usually better. But that's also assuming that interest rates are completely random (which they're not) - a bit of market timing is wise to do here. And the spread compresses when rates are low, making the fixed more attractive then because the premium is lower. Variable also makes a lot more sense with shorter timelines (either to sale or to early payoff).