So, which is better, a Fixed Rate or an Adjustable Rate on your Mortgage? Why it's such an easy answer, both! Wait, no, that's not it. The real answer is neither. Nope, that's not it either. Ah-Ha, I have it, the answer is both & neither. Yep, that's it, that's the answer. Thanks for stopping by, my work here is done.
I'm kidding of course, there's so much more that goes into answering that question, client to client, case by case. I should mention though, if you aren't into the whole semantics of money, statistics, charts, & jargon of Economics, this may bore the heck out of you. In fact, I would recommend skipping the next couple of paragraphs because what will be said will be about as interesting to you as watching Professional Bowling Interviews after a bad hangover would be for me. That said, I advocate at least trying to learn something about the Yield Curve. It goes back to that knowledge is power thing, especially for you budding Money Junkies!
If you are a more financially savvy type of guy or gal, Real Estate Professional or Consumer, perhaps you're astute with the what is called the Yield Curve. To learn more about the what a Yield Curve is and how it works, check out this site.
If you are looking to purchase a home or refinance your current mortgage, here are my thoughts on the Yield Curve:
*Flat or inverted yield curve in a historically low interest rate environment = I Say Go FIXED*
*Flat or inverted yield curve in a historically high interest rate environment = A Tough Call. It REALLY depends on the individual's situation, but I dare say I would lean towards an Adjustable Rate to take advantage of riding rates down through the cycle.*
*Standard yield curve in a historically low interest rate environment = FIXED if a longer term purchase (10+ years), appropriate ARM if a shorter term purchase.*
*Standard yield curve in a historically high interest rate environment = Appropriate length ARM*
*In a standard yield curve, do NOT pay the premium for a 30 year protection when the vast majority of folks will not use the 30 year protection. Many won't need interest protection any longer than 10 years, hence the reason I like the 10/1.*
Home Equities = eliminating the open end vs. closed end mortgage situations = If Prime is very low I would recommend taking the rate that is fixed, if prime is very high, I recommend an adjustable rate - lock in the low rate when you can get it, use the ability of the ARM to move your payments down when you are at the top of the cycle.
OK, if you aren't dizzy by now, let's go a little bit simpler and look beyond the yield curve in determining rates.
A consumer's financial intelligence is rather critical in determining whether they should be put into an adjustable rate mortgage. A colleague of mine makes a good point, it's called The Sleep Principal. In other words, even if an ARM is the best option for you or your client, it is not the right option if they are going to lay awake at night worrying about the future rate of their mortgage. There's something to be said for having the least amount of worries in your life as possible. The roof over one's head is a terrible worry to have.
That said, what I really would like to concentrate is on all the 2/28 and 3/27 Adjustable Rate Mortgages and all the attention (some very negative) surrounding them. If you aren't familiar with what those products are, they are actually quite simple.
The 2/28 is a fixed rate for the first two years, after those two years, the rate then adjusts....Upwards.
The 3/27 works the same, only with 3 years of having a fixed rate.
Some called them Band-Aid loans, I'm not a huge fan of that term, especially if the customer needed stitches. Hence, the title to this post. A lot of what made these so popular is that those rates have been very near that to the best rates on the best market today and of yesterday. So, if you had credit bumps, bruises, bankruptcies, etc.....you may have been able to attain a rate on one of these programs in the 6% range for that 2 or 3 year time frame.
Then, things change, the rate adjusts and all of a sudden that rate changes and goes up, which means, your payment follows suit.
Let me point out the Good, The Bad, The Ugly, of these very products....in my own opinion.
The Good:
-It did give people a chance to re-group, get their credit back on the high road, and get further away from the credit bumps and bruises from the past. I've had numerous clients follow the plan & guidance I helped lay out and it took their scores from a 550 to over 700 when their rate was rate was about to adjust. It was in these instances that I could then put them in what would probably become their permanent financing, getting the best rates the market had to offer.
The Bad:
-Mortgage Professionals qualifying borrowers off the 2 or 3 year teaser rate to make sure their income qualifies for the loan. In my opinion, this was and is a bad idea all the way around. Anybody who is put into an adjustable rate product, should never be qualified off the floor rate. I'm not saying they should be qualified off the cap rate (or maximum % the rate can go up to) but I figure there has got to be a happy medium. How about qualifying them off the first rate adjustment?
The Ugly:
-This is the heart-breaker in my eyes. Take a family who was in a 2/28 or 3/27 and financed 95% to 100% of their home's worth at the time they went into that program. They did everything right, paid their bills on time, took care of any outstanding credit demons, and now their scores and credit file are in great shape! Except for one thing. They go to refinance and you find out they don't have enough equity to do anything at all. They're stuck and their rate is increasing and payment is following suit. Many areas have little appreciation, some as of late, none at all. Generally speaking, a client should not be put into these programs if they are financing more than 90% of their home's worth.
The bottom line is for the most part, there is no clear-cut answer to whether a fixed-rate is better than an adjustable or vice versa. It's a situation based answer. I will say though that the financially savvy people out there are the ones that can handle and benefit from adjustable rates the most. A large part of our population isn't financially savvy, especially about mortgages. Our high-schools and colleges need to address this. For the population who is in that boat, the fixed rate is probably the best way to sail.
I went fixed rate because I didn't like thinking my payment would go up. After years in banking, I know that no matter how much people make, they will find a way to spend it all. :o) I love your idea for qualifying people for the first rate adjustment on an ARM. Shouldn't it be that way anyway??
"The roof over one's head is a terrible worry to have." Great line!Jason,
Nice explanations, I think it was clear to whomever reads this, like we have said before, we all have our own opinions on these programs..Good Job!!
Tom Weiss
Sarah - I think it should be that way when qualifying borrowers, it wasn't most of the time though. I hear you on people's spending habits...I could use some better ones myself.
Tom - Yes, we do have our opinions. That's one of the reasons I'm anxious to read all of the posts.
Jason, Wow! Strong! You broke out the Yield-Curve-can-of-whoop-___ on us!
Jason.... I am going to read this later tonight.... looking forward to it. But just a FYI... the picture doesn't show up. Now, I am not sure if it's my browser or that the link is missing now? Just thought I would let you know since I can't see it. thanks
Rey - Yeah, I usually don't do that but every once in awhile you have to dig up some info, get in some ears, and go for it.
Jeff - Ok, let me know later.
Sis - That's good, I thought it was me for a minute there.
Great post! I might have to reread like John says :)
Rob - Would love to hear your thoughts.
John - I hope it gets better instead of worse:-)
Jeff- OK, that's a good thing.
Scott - I have to re-read this stuff. Not the easiest read on earth, but it's an attempt to educate in whatever way I can, the parties that come across it.
Missy - Thank you and you are right. We work for the clients and need to act, react, & proceed according to their situation. That's not always an easy answer or good news....it is oft-times a more complex answer and implementing a plan to help put them where they need to be to do what they are looking to do.
Great post! You got a little technical but then you also broke it down to the basics. And I love the concept of The Sleep Principle.
Jason, I must confess that at this moment, I merely skimmed the surface of your Rates 101 class. I intend to, like many others in the class, come back and read it in it's entirety first thing in the morning. Frazzled brain syndrome you know. Selling our home, buying raw land, building a 6000 square foot dream home, and this business is a bit overwhelming when you throw in two kidlets, 2 cats, and one very high maintenance toy Pomeranian. Looking forward to your wealth of knowledge.
Sarah Eubanks
Lol Sarah, very nicely worded contribution! 6000 square foot dream home huh? That's a wealth of space....I hope you're not solely in charge of cleaning all that!
I have a cat myself, his name is Baxter. He, like most cats, likes birds. Not sure what he'd think of two kidlets, another cat, and one very high maintenance toy Pomeranian....then again, that's probably why he signed up with me:-)
Jason... I am back..... well, I have to say that this was one of the better layouts of arms verse fixed rates. I loved how you threw in yield curves and what to do depending on the type of yield curves. But you missed one thing, how to determine those curves. If they don't understand how and the loan officer doesn't, what then? lol Ah, call Jason Sardi....
Seriously though....I think you did a great job here. And this next comment is not suppose to be negative. But where did you get rates for a 2/28 in the 6's?? If and when you did, it was on average to above average credit scores with good LTV's... I would say the mid 7's and higher would be a better assessment when... but I know, that is irrelevant here.... lol I guess I am just a stickler when it comes to stuff like that. Again... great job.
You are back Mr. Belonger, a man of your word. I like that. As far as yield curves, I didn't want to go into too much detail...or this particular post would truly bore the tears out of even Al Gore. I hear he doesn't cry much, perhaps that is a vicious rumor. Besides, I'm not a technical or jargon sort of guy, unless I want/have to be. That's why I provided a link to a site where they could visit and learn more....
As far as rates in the 6's, man, I was kind of surprised as well. A lot of what I saw, I didn't originally make in giving them those loans in the first place. Yet, I saw individuals and families who had a nice equity standpoint, clean mortgage history, didn't qualify for FHA or DU approval on more traditional financing, get rates such as these on 2/28's and 3/27's. I cite as an example, New Century, who were priced so far under everybody else before they went under.
Thank you for the kudos and critique, I love them both!
Jason... okay, that makes sense and that was my point. Most 2/28's were priced higher and given to those that had so-so credit. I guess what I was getting to is when I mention something like that, I state how someone got that. Otherwise people as myself will bring it up.... lol Critique it as some will say.. ;o)
But again, that is off topic... back to topic... I think you stopped at the right time when explaining the yield curves, because yes, it is boring..... maybe my blog will be yield curves on drugs.... lol Nite, I need some sleepo.
Jason,
Too many lines and graphs for me to decipher. I might need to hire you just to explain it in less words...but then you wouldn't have a good blog here. :) I'm not that intelligent:) I do better with crayons :)
Marlene - Thanks, that's especially nice to say considering I'm not much of a dancer:-)
Sondra - I knew some of this would make peoples' head spin, sometimes I hate talking techie. I did warn you at the beginning though ;-) However, I thought it was relevant here.
Neal - I work for cheap Neal and have no problem using crayons:-)
Ann - Thank you.
Chris - She's a tough one to keep up with:-)
Geez. Things were certainly a lot simpler when the ARM was 5% and the fixed was 71/2%.
Things are not so simple today.
Jason, Great once again nice post. :-) love this part "The bottom line is for the most part, there is no clear-cut answer to whether a fixed-rate is better than an adjustable or vice versa."
Nothing drives me crazy when people state ALL I do is fix rate.... I guess they really don't understand the industry than
Matthew - I agree, diversity is the spice of life & mortgages. Not everyone's needs and goals are the same.
Shaun - Yeah, the Yield Curve isn't something I usually spout off about and it's not the most exciting thing in the world to bring up...but I felt it relevant.
Jason, you squeezed a lot into one post and covered a wide array of issues surrounding fixed rate programs and ARMs. You could have gone off the path on anyone of these topics, but managed to provide just enough of each to keep it interesting and not lose the consumers that will read this.
Lol George, it wasn't an easy gig. Thank you for the compliments though, it means a lot coming from a guy whose experience & expertise is akin/more than mine.
Hello William - You are too good to me. There was so much to try to get out there in answers with the questions posed, it wasn't an easy task at all. There was a bunch of guys and gals who did a very good job at doing it....
By the way, you are too good to me William. Thank you sir, onto the learning and living thing.
Jason...Great psot and this should be a top post in my opinion. I am glad you got into the Yield CUrve aspect, in greater detail than I did I might add. I dare say that most mortgage professionals do not understand the Yield Curve and its impacts. Being as I am a "techy" type of guy, I enjoy reading some of the so-called "boring" stuff. But then again, I like reading tax codes every now and then...lol.
Knowledge is power and that power can be used to change the lives of people positively. Thanks for sharing your insight.
Jason, thanks for the compliment. I strive to learn more and more each day, as there is still much I can learn as well. Instead of sending you something from the tax codes, I suggest reading the various publications they have available on their website. That way you can target a section at a time.
Amazingly enough, the tax code sort of contradicts itself at times (what may not be deductible one way could be deductible another way). I learned that just prior to being audited for my 1993 tax return (I knew I would be audited since I was able to get a refund equal to every penny sent in back then). The auditor said I could not deduct a certain item ($8,000 amount) under a certain code. I then said ÿou are correct, however I am deducting it under this code..." After I directed it to her, she read it and said OK and basically left, never to be heard from again.
Wait a sec, you're actually Sally's brother? Don't be messing with my mind!
Jason.... CONGRATS on 1st place.... you definitely set the bar on this one. And who said you just write blogs based on feelings. I guess the Spidey senses were certainly turned up a notch here. :o) Great job....
Jason,
Congrats big dog, maybe this will make up for having to climb in your house :0) Just teasing...
Tom Weiss
Sis - Thank you!
Congratulations Jason You did it and in style. You are now rich in points and I would like to borrow some. I would like to structure the loan as an ARM of course, no fixed rate for me. I might inherit some points down the road and would then like to reduce the principle, thus reducing the re-payments to you. Let me know when you want me to sign. :) What's my current start rate and is there going to be a cap?
Congratulations again and enjoy your honors.
Sincerely,
William
Hi Jason, I guess I'm a little late to the party. Hard work should be rewarded. Congratulations. I'm tired (already since I'm a newbie) of seeing "nothing" posts get top honors.
As for yield curves, I've never thought of them as a consumer statistic but rather one of ours used to determine what to "sell" and when to lock.
I like numbers. So much can be expressed with numbers. Numbers allow for enlightenment. Long live numbers!
Bill Roberts
Congratulations Jason. Very interesting article. I believe this was a much harder contest to judge than the agents' segment. The articles were very good. You provided some real "hard core" mortgage information, which I appreciate.
Jason,
ONE QUESTION: How can you be so humble when you know you're great? Congratulations!
Thank you for everyone's support and kudos! This is one of those rare times where I'm almost speechless:-)
Rey - Congrats to you as well man, you came up big.
Bryant - Thank's Dad, that's high praise from The King around here!
Scott - I gave it a whirl and it came out pretty decent. I hope it is relevant info for anybody who reads...
William - How about a no point 500 point loan. Your credit is good with me and I can put you into an adustable rate. Start rate would be 2.5%, since you are a friend. Your cap rate is 5.5%. Just don't go 30 days down, I have a horrible knack for smart alleck collection calls:-)
Bill - Being a numbers guy isn't a bad thing in this biz.
Lenn - Every once in awhile, I can be hard-core:-)
Brian - Thank you sir, that is a honor coming from you.
Gary - Thanks, this wasn't an easy task...as I'm sure everybody can tell you.
Shaun - Thank you for helping to make us all up our games.
George - I would of loved to see a post contributed by you, though a better candidate for a judge for this type of competition may not be found. I read all the posts, it couldn't of been easy.
Sondra - Now how am I suppossed to answer that? :-) I won't entirely play the humility card but I am by no means great, plus there were a whole lot of guys and gals whose posting made us all try like heck to step it up a notch.
Hope I didn't miss anybody.
Hey Jason,
I have a 30 yr fixed rate under 6% no points and no prepayment penalty what so ever. When I bought my last primary residence I was really close to doing an adjustable...but thankfully enough if I did I probably would have gotten caught in the RE vacuum...and now I am loving it. I have over 800 credit so I can pretty much dictate the loan I would want. It was safer on my primary...but I though the idea was good but noe looking back I am glad I did the old fashion loan. I would only consider refinancing if the rates were 2 points less or it does not pay.
Hey Neal,
Sounds like you made a good decision and refi'd at the right time. There's a lot that goes into it, but you seem to be in a very good position.
Why didn't you come to me for the loan:-)
Thesa - Was, is, could, should, maybe, perhaps, none the less....thanks:-)
Todd & Danielle - Personally, I love the sleep principal. It brings back to light something we forget, the human element to lending money and borrowing it.
Jason,
Congratulations Content winner! You bring knowledge, humor and kindness to the table for your customers.
Jason,
Very well done!
You've earned your accolades, today.
My answer to your question is depends. It's also good advice on what to be wearing when the adjustment notice arrives.
Bill
Sue - Thank you very much!
Bill - Thank you as well Sir. That's an honor coming from you.
Damn Jason, you're not just another pretty face at First Choice Equity Group, Inc.
You know how I go crazy when "Mortgage Guys" speak that weird language that baffles the hell out of me (kinda like when you, Scott and Beth were chatting yesterday about some account...). When that conversation was going, I decided to shoot up some heroin.
This blog was clear and concise. It was not only informative from a pure education standpoint, but provided your personal look at the various scenarios. As someone else noted, this is a great reference source. This is the language NON loan officers, or at least idiots like me, like to hear.
Congrats again, job well done.
(Oh, I ignored the Yield Curve part... we can get to that some other time :^) )
Mr. Rob - I always knew you thought I was "Pretty." I was actually thinking while writing this on how bad you hate the jargon that professionals oft-times use. Thank you and I don't blame you on skipping the Yield Curve part:-)
JR - Thank you, I think all of the entrities to this particular contest were good reads for consumers out there.
Jason, one of the best explanations of the difference between fixed rates and ARMs I have ever seen. Maybe my comment will bring you back up to the top of some group. Maybe it is time for you to re-blog it. The information is still relevant.