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Fixed Rate Loans Are Risky, Too

Jessica Lanning

This will always be a pet peeve of mine:  Those that lecture that the 30-year fixed-rate mortgage is less risky than an adjustable rate mortgage.   It’s not true.  Fixed rate loans are risky, too…not to mention expensive.

But my mom told me to get one!

Of course she did.  Or your dad did or your grandmother, or whoever you take familial financial advice from.  They all told you to put 20% down on your house, get a 30-year fixed-rate mortgage, make extra payments, and get it paid off as soon as possible.  If I’ve heard it once, I’ve heard it a thousand times.  “I’m financially conservative,” my clients say, as if I’ve ever had a client come in and say the opposite.  No one—not one person!—has ever come into my office and said, “I like taking risk, let’s be risky.”

Here’s how I define financially conservative:  Managing one’s finances such that one has the ability to weather any financial storm or take advantage of a financial opportunity.  That means managing one’s cash and cash-flow to one’s best interests.

The 30-year fixed-rate mortgage is risky.  The risk?  That interest rates remain low. When you get an adjustable rate mortgage, you’re gambling that interest rates go down. When you get a fixed-rate mortgage, you’re gambling that interest rates are going up.  Gambling is gambling.  At times, your odds are better.  Right now, interest rates are historically low and the odds are on your side that rates will go up, maybe even considerably so.  But maybe they won’t.  I can’t tell how many years have gone by in which I’ve been saying that.  Probably since 2002.  I can’t tell you how many of my clients have refinanced at least once in that time period to get a lower rate.  And spending the money to do so.

Be conscious about what you’re doing.  The perceived “risk” that you’re really managing is unpredictability of payment.  For whatever reason, people love to know what their payments are going to be month-to-month.  If you’re going to be in your home less than 10 years, there might be a better way to manage that risk.  Imagine this:  You make your payment to the mortgage company and then “make a payment to yourself” by setting money aside into a cash account so that if in the future your payments go up (or you have to deal with another financial emergency or opportunity), you have the money available to meet that payment if you cannot do so out of income.  By doing so, you are money ahead and financially more secure.