Rising expectations of inflation are finally catching up to the economy's strong performance. And with it, interest rates. Now's definitely the time to switch our thinking to fixed rate loans, right? Well, perhaps...
It's worth remembering that, just as we would scrutinize cost vs. benefit or cost vs. use in shopping for any other commodity -- whether a car, a computer or a loaf of bread -- that shopping for interest rates on purchase money loans (i.e., money for a home) should also be similarly scrutinized. Put another way, does what you pay to borrow that money effectively match the terms of how you intend to use it?
A $3,000 computer may well be worth it if your expectations for it reasonably justify your outlay in context of how you intend to use it. Clearly, if all you want to do is some light wordprocessing, e-mail, and occasional internet surfing, a $3,000 high-end computer isn't the most efficient use of your $$$ given other models in the market. On the flipside, if you travel alot and need a compact, lightweight model with high resolution to deliver lots of presentations, seamless WIFI connectivity, data security and a robust software suite, then clearly a $600 desktop wouldn't be the way to go, either.
Traditional wisdom holds that, generally speaking, when rates are heading north we should seek the comfort and security of fixed rate terms. In that way, so goes the thinking, we know upfront exactly what the costs are and can account for it in our planning. While that's certainly sound advise, it's isn't a "one size fits all" model.
Even with rising interest rates, you may find it worth considering alternatives to the fixed-rate solution. (Sorta like looking to see what other computer models are in the market that may better serve our specific needs.) With your loan consultant, you and your spouse should compare the perceived risk (cost) of adjustable rate terms (ARM) against terms you have for the intended use of the borrowed funds.
Consider, for example, a scenario where you and your spouse decide there's a reasonably good chance that you'll be staying in your new home for no more than 5 years. Then, in this case it may be worth asking your loan consultant to help you compare the benefit of a fixed rate loan against the benefits of an adjustable rate loan that stays fixed for those 5 years.
As of this writing, 30-year fixed rate loans might be found at 6.34% whereas a 5/1 ARM (one that stays fixed for 5 years and then varies annually thereafter) might be found at around 5.0%. To put that in perspective: a $400,000 home with 20% down could mean the difference of over $270 a month in principal and interest alone. A savings of over $16,000 over the 5-year term.
I'm not certainly saying this scenario works for everyone. What I am suggesting, however, is that just like buying that computer, car or loaf of bread, consider the terms of use for a thing against the cost of that thing. Your loan consultant should be more than capable in helping you determine the right solution for your scenario. Present your situation, and let her help determine a customized solution for you.
