Are fixed-rated mortgages really that common in US? Around here afaik pretty much all mortgages are variable-rate, generally EURIBOR or something close to it. Or am I confusing things here?
If rates are going down they are a great choice as you will refinance in a couple years anyway. However you have to really know what rates (read the economy) will do so that just as they reach the bottom (you don't need to hit the exact bottom, just get close) to refinance to fixed rate.
They are also good if you have reason to believe you won't live there for more than a couple years. (in general renting is better than buying if your time frame is less than 7-10 years, but local factors may force you to buy anyway).
Since ARMs are lower rates they save you money in the short run. However they tend to adjust up after the terms and so can really hurt you.
Edit to add: also, if you knew you were going to sell (and confident you could actually sell) within a few years, the lower initial rate of an ARM made sense.
I have a buddy who got a fixed 15y when rates were super low b/c he wanted to pay his mortgage off early. But, locking into the 15y barely lowered the rate vs a 30 fixed. I told him to do the 30 fixed, and just pay it as a 15y. This would give him flexibility if he lost his job or had some other emergency.
Better to pay off the house when you retire and enjoy life a little more. Of course you should save for a nice retirement, but don't plan all for when you get old. (Renting can also work out well, but you need more in other investments when you retire so you can keep paying rent)
> They are also good if you have reason to believe you won't live there for more than a couple years
Generally speaking, it's better to rent in that case. You'll have more flexibility and substantially less risk.
It's also great to put all my money on black if the roulette wheel is going to land on black. Mortgages are long term, making predicting future rates 3-5-10 years out very hard.
> Since ARMs are lower rates they save you money in the short run.
The low rates of the last 5ish years compressed the difference between fixed and variable that there was little reason to take on the variable risk. As rates go up, that calculation will likely change.
> They are also good if you have reason to believe you won't live there for more than a couple years.
You should rent then. The cost and friction of RE transactions are too high for someone not planning to be there for 2+ years.
ARMs are not a bad choice if you know what you are doing.
It is also a great choice if you are not planning to stay at a place for all your life.
It's a risk thing.
ARMs are not the devil just as CDOs aren't the villain.
Do you think they'd set a fixed rate where they lose?
And they almost all have the early repayment penalty.
A variable rate has historically been more beneficial than a fixed rate.
A fixed rate should be seen as an insurance you pay a premium for. If the risk of it going up so much that you can't afford it, then it's absolutely a great idea to get a fixed rate, but otherwise you'll earn more with a variable rate.
Variable also makes a lot more sense with shorter timelines (either to sale or to early payoff).
You would have a variable rate with no repayment fee or a short fixed rate (max of 10 years) with a repayment fee.
Serves as the vast majority of our government's intervention in housing, with very small sums for (a few) very low income people and basically nothing for anyone in between.
This editorializing was totally unnecessary for the question that was asked.
100k at 15yr and 6% interest with monthly payments, the total paid back is $151,894.23 - the amount over 100k was interest.
100k at 30yr and 6% interest? Total paid back is $215,838.19 - more than twice the total interest paid back.
Also you’re correct about the higher cost of the mortgage, and this doesn’t really work as well at 6%… but if you had a 3% mortgage, you would have better returns taking the 30 year and investing the difference each month. The amount of money you’d make from the returns on that would, on average, be greater than if you paid off the mortgage in 15, then started investing. But yeah, doesn’t work as nicely at 6%.
>but if you had a 3% mortgage, you would have better returns taking the 30 year and investing the difference each month
That would have been a good strategy over last decade certainly. Though that's hindsight and you're effectively taking out a loan and investing the money.
Obviously it you can't control yourself with money then don't do this.
When I bought my house I went with the 30 year mortgage. The interest rates between 15 years and 30 years were not hugely different and my 30 year interest rate was so low. I ended up really glad I did.
If the rates between the 10/15/20/30 are roughly the same, then the person should take the 30 and pay it back like they would the 15 (~double payments). The reason is the person is now protecting themselves from life change risk. If they lose their job they could go back to making the minimum payment.
The advantages of getting the 30 yr are
a) You don't have to keep paying that extra principle on your 30 year mortgage. If you lose your job or whatever, you can fall back to making the regular payments
b) The time value of money aspect. My mortgage is currently well below inflation. $151894 in 2035 dollars might be more expensive than $215838 in 2060 dollars. Especially if you're able to reap the tax benefits of mortgage interest.
The max fixation period I regularly see on offer is 7 years.
Yes, for decades they were the standard. Prior to 2008, ARMs became more common, and now it's a mix but I'd reckon fixed rate in the US is still predominant.
The US federal government is highly involved in the mortgage market in the US through Fannie Mae and Freddie Mac. I don't think 30 year fixed rate mortgages would be something one could find in a "free" mortgage market.