Is A Fixed Rate Mortgage Your Best Choice Now?

Given the massive problems in the mortgage industry today, it is hardly a surprise most people are running for the safety of the fixed rate mortgage. Is this a smart move, though?

There are two general categories of loans in the mortgage world. One comes with a fixed rate mortgage and one with some form of adjustable rate mortgage. Fixed rate tend to cost more up front because the interest rate is higher than that of an adjustable rate mortgage. Over time, however, the fixed rate is often considered safer because it is a stable figure. Regardless of what the finance markets do, you will always pay the same interest rate and corresponding loan payment.

Unless you’ve been living in a cave, you probably know about the mortgage industry mess we are in. Simply put, far too many people were given money than should have been. To compound matters, borrowers often stretched to get into houses they really couldn’t afford. Almost all of this was done through one form or another of an adjustable rate mortgage. When rates went up or reset to higher levels, people couldn’t meet the payment obligations and the real estate bubble exploded like the Hindenburg.

Given this scenario, the common notion these days is a fixed rate mortgage is where you want to be. Is this really a smart choice? It may be, but the picture is not nearly as crystal clear as the pundits would want you to believe. Whenever something goes wrong in a market, there is often a major overreaction. This scenario may be playing out when it comes to mortgages.

To gauge the merits of different loan products, we need to take a step back and look at the big picture. What do we see? An economy that is cooling off in a big way. Most believe we are in a recession and will be in the doldrums for the next few years. What happens in such a market? The Federal Reserve tries to fire up the economy by making money cheaper. This ultimately leads to lower interest rates on mortgages, a fact we are already seeing as the fed has significantly been cutting its rates.

If we are in a recession, the likelihood of the Federal Reserve cranking up interest rates is pretty remote. Doing so my throw us into a depression, not a recession. Given this fact, the “risk” of going into an adjustable rate mortgage probably is not found in the interest rate potentially going up.

Does this mean you should go with some form of an adjustable rate mortgage instead of a fixed? There is no correct answer. Do you own research and make an informed decision. Don’t just discount the idea of an adjustable mortgage out of hand.

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