3 votes

Fixed versus variable mortgage

A friend of mine needs to choose between a fixed or variable mortgage.

I said fixed would probably be wiser, as these artificially low interest rates cannot last, and combined with inflation, fixed would likely be the best.. But am not fully sure. Can anyone advise? Thanks!



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Thanks for the valuable feedback all!

Thanks for the valuable feedback all!

robot999's picture

Go Variable

the FED will not raise rates, and the variable rates are super low. Also, they are fixed for 3-5 years. Remember that raising rates is what the FED should do to get the economy back on track, so you know they won't.

"Government is the entertainment division of the military-industrial complex". - Frank Zappa

Go with the fixed rate.

Unless you plan to pay it off before the rate has a chance to reset higher. That is to say, if you can pay it off in five years then go ahead and take the 5/1ARM and save some interest money. Otherwise take the low fixed rate, and let the bankers choke on their own inflation.

Josh Brueggen
Engineer
Entrepreneur
Gardener
Jack of all Trades
Precinct Commiteeman Precinct 5 Rock Island Co Illinois

As low as interest rates are

I don't see any good reason to go with a variable rate mortgage. If interest rates were artificially high instead of low then you would consider a variable. Although I wouldn't be surprised if they have some bogus up front fees now on fixed rate so that variable will look better. I mean just how much lower can mortgage rates go? But with just a little uptick in the rate you pay a lot more on a 30 year mortgage.

I have never been one for variable rate loans whether mortgage or credit card. I like to know what my bills are and the idea that my payment could go up tremendously over night is unacceptable. I was forced to cancel my credit card because they tried to change my rate from 7.99 fixed to 12.99 variable and I have an 820 credit score. Pissed me off something fierce. This was after we were already ripped off with the bank bailout. And I had that card for years. Grrrrrr. So much for all that honest work building up good credit. I didn't carry a balance over so the interest rate didn't really affect my bill but it was the principle of the thing so I told them to stick there credit card.

Like the guy said below, if your friend can live on the cheap for a few years and save his/her money so he/she doesn't have to enslave themselves to the bank then go for it. Otherwise go with a fixed.

wolfe's picture

Too many unknowns...

Calculate out the payments as if the max were hit on variable. If she can't afford it, then that is significant risk. Do they plan on keeping it more than 5 years?

Fixed is clearly the more stable approach, generally, but there are reasons to use variable in some cases.

Now, having given the "generally held belief". Let me tell you the truth.

If you can't afford something, then you can't afford something. It really is that simple. When you get a mortgage, there are a few things that happen.

First, you agree to pay the bank greater than 10 times the cost of the house.

Second, you put yourself on a road to bankruptcy because you have sold your future earnings, which unless you have a 30 year contractual guarantee from an employer, you WILL not be able to afford it at some point. So not only have you agreed to pay the bank far more than the house is worth, you have promised to remain in service to pay them that amount for the next 30 years.

Here's what your friend should do. Learn how to budget. Live off of next to nothing for 2 years. Buy a house with what savings have accumulated. Not quite the price range of the home they wanted? Tough crap, that is what they can afford. Then get wealthy by saving the money that they otherwise would have given to the bank and eventually buy a better home, also cash.

Trading your future for something you can't afford is the American way. But it really doesn't have to be.

The Philosophy Of Liberty -
http://www.thephilosophyofliberty.com/

Here Here

Also, don't be afraid to buy a fixer upper. You can get great deals sometimes. I just put an offer on a huge old victorian (pretty solid house overall) listed at just 27,000. With a little elbow grease, and a lot of paint this place will resale for north of 150K in a couple years. Best of all, if I live there at least two years the capital gains are tax free.

Josh Brueggen
Engineer
Entrepreneur
Gardener
Jack of all Trades
Precinct Commiteeman Precinct 5 Rock Island Co Illinois

If I had to do it again

I'd have bought a foreclosed property for half the cost. I've been in a 5/1 arm since I bought the property about ten years ago. I was a bad libertarian and got the government involved with a FHA loan- mostly cause I was being pressured by my parents to not throw away my money. So I put about 3% down and have been house poor ever since :)

I don't think you should get I 5/1 arm. I was worried that the interest rates would begin to raise on it after 5 years but because we are hell bent on destroying our currency it has done the opposite. My credit is farely trashed but the interest goes down every year. Go figure.

You wanna buy my house? Colorado. Backs to land. Front range views. Nice neighborhood, park, mountain views, patios, southern exposure great for gardening ;)

In the beginning of a change the patriot is a scarce man, and brave, and hated and scorned. When his cause succeeds, the timid join him, for then it costs nothing to be a patriot.

wolfe's picture

lol...

That sounds like exactly what I want to buy. Sadly, I doubt I have the cash to cover it... ;)

The Philosophy Of Liberty -
http://www.thephilosophyofliberty.com/