If you’re a homeowner and have a mortgage, the next few minutes could save you tens of thousands of dollars, or create a financial nightmare for you in the next two or three years or so. It’s up to you, but let me explain:
I’m looking at a national newspaper ad that has been running over and over again across the country, from one of the big banks marketing adjustable rate, or variable rate, mortgage loans. While the rate is really low, you have to remember that it is not a fixed rate, it will adjust when rates change, and that risk or gamble is entirely yours.
For most of us, it’s critical that you remember that your best interest rate is always your worst mortgage. That’s simply because YOU are taking on all the risk of rising interest rates. Right now, rates are at or near the lowest they’ve ever been. When rates change, where do they have to go? It has to be a rate INCREASE, and your mortgage loan will rise right along with it.
Right now, there are literally millions of families in the U.S. that can attest to that, because they took the mortgage gamble and did not choose a fixed rate. As a result, they just couldn’t afford the payments when rates started to increase. The rough rule of thumb is that every $100,000 you owe will jump your payment $70 for a one percent rate increase. So if you owe $200,000, that’d be $140, and if you owe $200,000 and rates go up two percent, that’s about a $280 higher payment a month.
Now, a bunch of economists in the same room couldn’t agree on what day it is today. And with that in mind, you need to remember that none of us have a crystal ball. But we do know for a fact that rates will go up sooner or later. BMO Capital Markets did a research report in December that predicted rates will rise by four percent between this year and 2012. Others believe we’ll be at current rates for another year or two. I don’t have the answer, just the heads up, and some options.
Gary Marr is a national financial writer. He had a column last year claiming his biggest mistake when he was younger was to take a fixed-rate mortgage. For him, and most of his readers, that’s great. He has the monthly cash-flow and income to ride out any rate increases and not feel the pain. But when we talked about the poll a few weeks ago, that more than 60% of families live paycheque to paycheque, tell me where those families are supposed to find another $200 to $400 a month? Should those families gamble on the temporary low rates, or take the sure thing and have a fixed rate mortgage?
Debt and credit are not about logic, they’re way more about emotions. It isn’t logical to charge something on a 20% credit card. Is it logical to finance a car for seven or eight years just to get a slightly lower payment than a four-year loan? Does it make sense to go to a payday lender at 400 plus percent, or to finance that “don’t pay for six months” when two-thirds don’t pay it off, and the rate is around 30%? Or is it logical to take that line of credit, gambling our home as collateral, and pay interest only, knowing we’ll be paying that for the rest of our lives?
None of that is about logic, or we wouldn’t do it in the first place. So I would suggest that the last thing most of us on a budget need is to have more uncertainty with our largest debt and our biggest monthly payment. The math makes an adjustable rate a better deal today, and for another year or two. If it were only about math and logic, wouldn’t we all be debt free?
I don’t have the answers. But I do know that knowledge is power and when we know all of our options, think ahead and consider the consequences, both good and bad, we’re light years ahead of 90% of the world. And when we’re informed we won’t turn our dream home into a nightmare mortgage down the road.