Are you trying to decide between a 30-year fixed rate mortgage loan or an adjustable rate mortgage (ARM)? With mortgage rates so low, it’s hard to go wrong. However, it is my opinion that a 30-year fixed mortgage loan is a suboptimal mortgage that will cost you extra money.
After taking out multiple mortgage types since 2003, getting an adjustable rate mortgage is cheaper and will save you more money over time. We’ve been in a declining interest rate environment since the 1980s. The Federal Reserve has also indicated it will keep rates accommodative for the foreseeable future. To pay more for a 30-year fixed mortgage loan is unnecessary.
Banks Love 30-Year Fixed Mortgage Loans
One of the biggest secrets banks don’t want you to know is that they make more money off larger and longer duration loans because they can charge a higher mortgage interest rate.
Banks take advantage of fear of the unknown by selling borrowers peace of mind. There’s certainly value in knowing that over a 30-year period, your mortgage rate will never go up. However, there’s something bank also don’t want borrowers to know.
Interest rates have been coming down since the late 1980s as the Federal Reserve has become more efficient in managing economic cycles and the US has grown to the world standard for sovereign assets through the purchase of US treasury bonds.
From this simple chart, you will understand:
* The risk free rate of return
* Expectations on interest rates
* Expectations on inflation
* Borrowing/credit costs
* Risk aversion, or lack thereof
* The health of the world
That’s right. By understanding what the latest 10-year treasury means, you will be able to save a lot of money, potentially make a lot of money, and stop being so fearful of the future.
Borrowing on the long end is a suboptimal use of funds. The people who are pushing you into 30-year fixed loans: 1) Are not economics majors or bond traders, but journalists and/or 2) Have a vested interest in you borrowing as long as possible so they can make as much money off you as possible.
The higher the rate, the easier it is for them to earn a wider spread.