Fixed Rate Borrowers Should Suffer the Same Types of Regrets

What if you pass up a one-year ARM with a 4.0 percent start rate and a 5.5 percent contract rate, no points, in favor of a 7.0 percent, one-point, 30-year fixed-rate (a trade-off that was available several years ago). Then, within the next 18 months the 30-year fixed-rate falls to 6.0 percent. At the same time, the new rate on the one-year ARM falls to 3.75 percent (T-bill index + 2.5 margin). You're now paying hundreds of dollars more

1 The perceptive talents necessary to forecast interest rates attach to very few mortals. But in Secret #32 you will learn several clues to look for.

per month than you would have paid with the ARM.2 Do you feel the same high level of regret? Maybe not. Why?

When your ARM payment goes up, you're cash-out-of-pocket. But if you have chosen a fixed-rate loan and interest rates fall, you do miss a chance to benefit immediately, yet suffer no cash loss. The economic effect, however, remains the same: In either instance, ARM or fixed-rate, when the market moves against your present interest rate (down for fixed-rates, up for ARMs), your monthly payments may stand higher than they otherwise would have been had you chosen differently at the time you originally obtained your mortgage.

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