How to best play today's mortgage rates

Posted by  on Aug 05, 2012

Q: With mortgage rates falling so quickly, I know there's a lot of debate about when to pull the trigger - do you lock in a rate now or wait for them to fall even more? Why isn't an adjustable-rate mortgage the simple answer? That way you could take advantage of today's mortgage rates but still benefit if rates continue to fall. Right off the bat, you'd be getting an initial rate which is almost a full percent below 30-year fixed mortgage rates.

A: Here's what you need to consider first and foremost: 30 years is a long time.

Everything you say is true, but the problem with an adjustable-rate mortgage is that you no longer just have to worry about current mortgage rates; you would also have to worry about what rates will do over the next 30 years. That introduces a huge amount of uncertainty into your decision.

There are a couple things to consider here. Firstly, buying a home is not purely an investment decision; it is a necessity. Once you find a way to meet that necessity at a price you can afford, the risk of that opportunity going away is potentially more damaging than the risk that you miss a chance to get a slightly cheaper rate in the future. Secondly, interest rates can fluctuate widely over the course of 30 years, and current mortgage rates are at a level where they have much more room to rise than to fall.

There are three possible outcomes to your situation:

1.  You could act now and lock in a monthly payment you can afford with a fixed-rate mortgage.

2.  You could wait and risk missing the opportunity to buy altogether.

3.  You could go with an adjustable-rate mortgage and risk seeing your monthly payment become unaffordable in the years ahead.

Only one of these outcomes puts you in a house at a payment you know you can afford. The choice seems clear.

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