New Mortgage Bonanza
by Michael Chadwick

The financial institutions have become more and more aggressive at marketing new, hybrid mortgages. Today the ads seem too good to be true, save thousands each month, interest rates at 1 or 2% - if it sounds too good to be true it likely is. Think about this, if the bank made the same amount of money on every mortgage option, how many options would there be? There would be one. In today's interest rate environment it is very difficult to present a logical, economic argument for not going with a fixed rate mortgage. I hear many "arguments" professing the virtues of hybrid mortgages where you can choose your payment and variable rate mortgages.

A mortgage is a complicated financial vehicle with many moving parts and most people, even the bankers, don't truly understand the in depth impact a mortgage can have to a quality financial plan. The banking institutions of our world have a powerful incentive to push variable rate and variable rate hybrid mortgages today - because they have pricing power on the mortgages should the rates go up. By pricing power, I mean that as rates in general go up, so will the rates on variable mortgages.

 The new "hybrid" mortgage is where the consumer can decide how much to pay. These mortgages can be very risky and even cause negative amortization - you owe more on the note in 5 years than when you began. Read that again, that wasn't a misprint. Rates are at 40 - 50 year lows, if you plan on being in your property for a long time, go fixed, period. A logical argument can be made to go with a variable rate mortgage that is fixed for so many years and then becomes variable. Such mortgages are referred to as 7/1 arms. For the first seven years the mortgage is fixed and after that the rate can change each year. These loans come in different flavors such as 3/1, 5/1, 9/1 etc. If you know that without question you'll be moving in 4 years then the 5/1 or 7/1 variable may make some sense.

Home equity lines are mostly variable and that's okay. I like to see that equity line available so you have access to your equity - something you won't have should something go wrong in your world. You need to be disciplined enough not to use it for consumption, just for emergency or perhaps for leverage but consumption will dig you a hole.

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