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ARMed and Dangerous: How Not to Finance Your Next Home

Written by Gary North on July 26, 2013

The sheep never learn. This makes things easier for shepherds, who have their shears close at hand.

Americans are using adjustable rate mortgages — ARMs — to buy their homes. They look at the 30-year rate of 4.5% — an incredible bargain in an era of looming inflation — and opt for ARMs. They can lock in 4.5% for 30 years. This is one of the great investment deals around. But they were too dumb to do it early last May, when the rate on a 30-year mortgage was 3.5%. So, feeling left out, they sign up for ARMs. They think they can beat the system.

The Federal Reserve pumps $1 trillion a year into the economy, but home buyers think ARM mortgage rates will stabilize. If there is a depression, yes. Rates will stabilize. They may even fall. But how likely is it that the FED will stabilize money in a recession, let alone in a depression? Not very.

When you buy a house, buy the fixed rate mortgage. The house’s price will rise in inflation. The rate is locked in. You profit both ways. You own an appreciating asset, and you also have something productive to do with depreciating dollars: pay off your mortgage. An ARM undermines this strategy. Rates can rise. Under inflation, mortgage rates will rise.

People do not learn. They do not understand inflation. They do not see the opportunities that inflation offers to a minority of investors. So, rich people buy bonds, and middle-class people borrow with ARMs.

The Federal Reserve will make hash of the plans of both groups over the next decade. Don’t be in either camp.

Continue Reading on www.bloomberg.com

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6 thoughts on “ARMed and Dangerous: How Not to Finance Your Next Home

  1. Texas Chris says:

    Housing Bubble 2.0

  2. I have used an ARM a few times to refi my house and it served a definite purpose. However, I'm smart enough to know that the rate doesn't last forever and will eventually (after 3, 5, or 5 years, depending on the terms), jump to a (probably) higher rate. I no longer have one, but when I did it helped because of a lower rate for a period of time. If a person only plans to be in a house for a couple of years, a lower-rate ARM makes sense rather than a slightly higher fixed 30-year rate. It's the dumbos that get into an ARM, thinking it's forever, then finding out (3 / 5 / 7 years) down the road that they're faced w/ a higher rate because they low-interest term is up. If they're too stupid to pay attention to the details in the beginning, then shame on 'em.

  3. Or they go into the loan thinking as you do that they can sell quickly, but something happens. They lose their job due to a crisis i.e. 2008. They owe more than they can sell it for especially if the market takes a dip. These things are a not something most people take into account. There would end up being another foreclosed home on the market, but alot of times banks will hold on to these homes trying to prop up the price. They are subsidized for this reason. These types of risks wouldn't be so readily available if it weren't for their being incentivized.

  4. I had an ARM when rates were falling over the past 20 years and saved a bundle. That said, in today's climate you're crazy not to lock in a FRM. I am old enough to remember the 20% interest rates of the late 70's.

  5. Probably the time to take out an ARM is if their starting rate is higher than the fixed rate. That would tell you all you need to know.

  6. They are not shepherds, they are wolves.
    Shepherds and sheepdogs protect the sheep.