Fixed-Rate Mortgages Are As Risky As Adjustable-Rate Mortgages

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In an article titled "Fixed-rate loans means no surprises", the Washington Post suggests that fixed rate mortgages are the safest mortgage choice for homeowners.

This is not true. 

This article is another example of the mainstream media ignoring the finer points of mortgage planning and home equity management.

The author talks about financial "safety" which I measure in three ways:

1. How liquid are your assets?
2. How diversified are your assets?
3. What is your assets' expected rate of return?

Against those benchmarks, the 30-year fixed-rate mortgage fails terribly.

First, the 30-year fixed rate mortgage includes a principal paydown in every mortgage payment.  Those principal dollars are sourced from a checking or savings account that is available at a moment's notice.  Once applied to the mortgage, those dollars can only be re-accessed with a remortgage.

Second, as the 30-year fixed rate mortgage pays down, the homeowner's real estate investment increases by the amount of principal paid down.  Every dollar put towards the home is a dollar in housing.

And third, the money used to pay down principal has been taken from a bank account where it was earning interest and is now just "money on paper" where it gains nothing. 

Summarized, the 30-year fixed-rate mortgage renders a homeowner:

1. Less liquid
2. Less diversified
3. Less wealthy

In other words, the 30-year fixed-rate mortgage fails on all three "safety checks".  It's the opposite of financial safety.

That said, there is a certain class of homeowners for whom the 30-year fixed-rate mortgages is appropriate, but it's not suitable for all.  That's why blanket statements like "fixed rate mortgages are safe" are false.

Like every other mortgage product, a 30-year fixed-rate mortgage should selecting only as it fits into a homeowner's short- and long-term financial goals. 

Fixed-rate loans mean no surprises
Kirstin Downey
Washington Post, October 1, 2006

http://www.washingtonpost.com/wp-dyn/content/article/2006/09/29/AR2006092901101.html