Gyroscopic Investing

Leaving aside the debate about whether to keep a mortgage or pay it off... What are everyone's thoughts on fixed-rate mortgages as opposed to variable-rate? I'm thinking of doing a 7/1 ARM. IIRC, Harry Browne at one point recommended variable rate, but I forget exactly why.

One consideration: the length of time you will likely remain in the home.

... Mountaineer

I forget where in Harry Browne's books I came across that recommendation. He suggested keeping a small percentage in gold as "insurance" against interest rate increases. I considered that, but decided I was better off just putting the money into the principle and going with a fixed rate. I think he recommended that with the idea that interest rates were likely to go down, which they in fact did.

If you are planning to stay in the house for the long haul, then I can think of two reasons to consider a 7/1 ARM besides Mountaineer's suggestion: first, if you're planning on paying extra on the balance in the first 7-10 years, and second, if you're prepared to pay off the mortgage with savings if interest rates skyrocket. I spent some time playing with the dinkytown mortgage calculators before I made my decision (30 year fixed). Taxes were a big factor for me, though.

With 30-year rates at or near all-time lows, why not get the cheap fixed-rate money? Harry Browne recommended a variable rate when rates were significantly higher than now.

WildAboutHarry wrote:With 30-year rates at or near all-time lows, why not get the cheap fixed-rate money? Harry Browne recommended a variable rate when rates were significantly higher than now.

Because 30-year variable-rate mortgages are even lower. Something on the order of 2.5% instead of 3.5%. In general they're capped how much per year they can go up (they're tied to some index or something) and often have an absolute maximum they can ever go of 5%.

Xan wrote:

WildAboutHarry wrote:With 30-year rates at or near all-time lows, why not get the cheap fixed-rate money? Harry Browne recommended a variable rate when rates were significantly higher than now.

Because 30-year variable-rate mortgages are even lower. Something on the order of 2.5% instead of 3.5%. In general they're capped how much per year they can go up (they're tied to some index or something) and often have an absolute maximum they can ever go of 5%.

Generally the cap is quoted in reference to the initial rate..thus the mortgage could go to 7.5% using the above. Unless this is going to be a short term location, I think it's a major roll of the bones to pass up generational low mortgage rates. But of course there are other factors like age and over payments to whittle down the balance that could drive things one way or the other.

With a fixed rate, you can stay more flexible about the future. If you lose your job/your business falls on hard times and have to stay in the house. Or the housing market dives so you decide to stay in it longer before selling. Or if you decide to rent it when you move, you will have a fixed cost instead of a variable one.

I would never go with a variable-rate mortgage. The unexpected can happen and leave you unable to refinance, sell, or pay it off.