Economic Conversation

Getting a fixed interest mortgage is something that many home owners prefer to do because of the security.  With a fixed interest mortgage, you know how much you are going to be paying each month until the home loan expires.  With an adjustable rate mortage (ARM), your mortgage rate adjusts at different periods and the amount of your mortgage payment could shoot up.  You are aware of these dates when you sign the home loan contract, but few people keep up with the “reset” dates.

Part of the reason for the Subprime mortgage crisis was the resetting of adjustable rate mortgages.  Many home owners felt that they could just refinance at any time, get the extra money from the increase in their homes value, and use that money for other things.  All the while, they could refinance the ARM into another ARM.  This works out great if the value of your home continues to appreciate.  If the value of your home does not appreciate, you are in big trouble.  This is exactly what started happening in 2007 when the mortgage collapse began.

When home owners went to refinance their ARM at a lower rate they found out that the refinance appraisal came back lower than expected.  Some were ever lower than the amount they bought the house.  Mortgage lenders would not refinance a house that is underwater.  They were also unwilling to refinance, at a low mortgage rate, a home decreasing in value.  This meant that these home owners were stuck with the reset and they had to make the higher mortgage payment.  When the mortgage payment rose as much as several hundred dollars a month, many of these home owners could not pay the bills and a foreclosure followed.

This situation would not happen with a fixed interest mortgage.  With a fixed interest mortgage, you do not have to worry about any resets taking place.  Each month you will be charged the same amount of interest.  If you signed a 30 year fixed rate mortgage at a 5.5% interest rate, that will be the interest rate for the life of the loan.  This is the exact reason why some home owners feel that a fixed interest mortgage is much better than an ARM.