Now Is The Time To Get A Fixed Rate Mortgage

Avoid "bubble-mania," a FRM can help you to secure your investment for the long term.

By The Mortgage Guy / MortgageLoanRequest.com

Mortgage rates, as anyone whose mortgage isn't for a cave, a burrow or a nest will know, are the lowest they have ever been. People are refinancing (for better interest rates or to tap into their new found equity) or purchasing new homes as fast as they come onto the market. Some folks are even taking options on homes that are yet to be constructed purely as an investment. They hope to sell the option, the newly constructed home/condo or use them for rental/income purposes.

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In this mad dash to invest, people with little or no money and mountains of consumer debt are in a highly exuberant state, and signing onto interest-only (IO) and adjustable rate mortgages (ARM) like never before. Often, these investors have little or no experience in the real estate sector. Last year, twenty-five percent of all mortgages nationwide were interest-only, and the total of IOs and ARMs for the last two quarters of 2004 exceeded sixty percent. Typically, the more ferocious the local market, the more loans are sold. California, Florida and Georgia rank among the states with stratospheric levels of investment hysteria. Soaring prices and demand, far outstrip local supply in most of hotbeds across the country.

These types of loans may afford investors the chance to "buy up," take out equity for much needed cash flow, become landlords or even acquire a second home for vacation or retirement purposes. However, what is also being put into their shopping baskets are risks associated with investing, that may soon outweigh the rewards. Let history be a lesson for us here, i.e., the housing market in Texas back in the 1980's. No one ever expected it then and many do not expect it now. Back then people were so overwhelmed when the bubble burst, that they were simply mailing the keys to their homes back to the banks, because they knew they were going to be foreclosed on.

Currently, people in America are jumping in and out of their mortgages every time they see mortgage rates decline. Like stupefied day traders, drunk on the late 1990's dot.com mania, people are looking to make immense profits overnight. People who remember those times and did not get on that band wagon, think they missed out and refuse to be left behind for a second time. Thinking that they are savvy and increasing their cash flow by entering into these types of mortgages, they are missing a great opportunity that can help them secure their investment for the long term. That missed out opportunity is the Fixed Rate Mortgage.

We are now experiencing a period of low interest rates that is unprecedented. You would think that investors would realize that now is the time to secure a good rate for the future, but many are only seeing the short term advantages offered by low ARM and IO rates. They are tripping over dollars to save dimes. This type of investing usually happens when the differential between short and long term rates increases. The Fed has been pushing the short term rates up in hopes that the long term rates will also do the same. However, as Allen Greenspan has most recently pointed out, this is a "conundrum" of the presently "frothing" bubble that is expanding into markets everywhere.

Doug Duncan, of the Mortgage Bankers Association, reasons that the situation is like this, "This interest rate cycle is unusual in that the increase in Arms has occurred with a much smaller increase in rates than in past cycles; house-price appreciation leading up to this ARM cycle was much stronger than in previous ones, creating affordability constraints that led a number of buyers to seek lower payments with Arms."

Just a few weeks ago, the difference between rates on fifteen-year FRMs dropped from the previous week's level of 5.34 percent down to 5.28 percent, and for Arms it went form 4.20 to 4.11. All of this occurred in just a weeks time. This means that the difference in monthly payments on FRMs and Arms, is about sixty dollars a month for a $100,000 loan. Some folks just cannot resist, and many have stretched their budgets to such a point that this sixty dollar savings is all that they see. They have taken their eye off of the proverbial investment ball, and are choosing short term gains over long term stability and profit.

Homeowners who are looking to refinance, take money out, buy up or become real estate entrepreneurs, need to calm down and analyze their own budgets, needs and income possibilities. They need to reassess what ever situation they may be in, or are thinking of getting into, and closely examine the pros and cons. With markets in question, house prices soaring and lenders offering rates and terms that would have been scoffed at a few years ago, they need to consider the future of their investment in much longer and stabile terms. Mortgages are typically for fifteen or thirty years, when the average investor seeks loan approval, they must be prepared for the long haul and be willing to see it through. Taking a long-haul strategy is the only prudent investment path in these times of uncertain markets.

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