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Comment by binarytox1n | Hacker News Reader

Fixed rate is the standard in the US. If someone here gets an adjustable rate, I usually assume they are financially illiterate.

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Funny, cause I think the exact opposite. I've read numerous papers and in Australia at least, you are statistically better off on a variable rate something like 2/3 of the time. You pay a premium for the security of a stable interest rate.

My interest rate is fixed at 2.2%. It seems highly unlikely that interests rates are going to drop below 2% for a significant amount of time.

You can also (probably) save money by never buying any kind of insurance, but insurance is a useful risk mitigation. Someone who got an ARM a few years ago and is hitting the variable rates around now probably sees their interest rate roughly double. They likely aren't much reassured by the fact that historically, most people's mortgages had better timing.

I wouldn't say illiterate.

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.

One more specific example of someone taking a calculated short term risk: home flippers. They have had both good times and bad in the last 15 years. Those who financed with lower costs during hotter markets had better margins.

House flipping should probably be banned, though. It's bad for the homeowners who buy the house because it's invariably low-quality contractors who do the work and they invariably don't do it to code. It's bad for the neighborhood because the residents aren't stable.

This is a dumb over generalization. People that fix up homes are good for the neighborhood.

I'm curious what the alternative is? Houses in bad condition are even worse for the neighborhood

Ignorant here because I dont know how ARMs are actually structured as far as what the lender can and cant do, but the idea of signing a loan contract and having no garauntee of the upper bound of the interest rate is absolutely wild to me. Banks will fuck you at any opportunity they have, so habding then a loaded gun and thinking theyre not gonna raise rates without a reason is crazy to me.

Even if there were no limitations in the contract, there's still a market. If your bank diverged too far you can just refinance. And if the whole market is high, inflation is probably crazy and you're watching the principal dwindle to insignificance anyway.

The beauty of competition. The person lending you money always could fuck you over, but the greed of other banks would save you in that scenario. Which they know, so they don't fuck you over. Same reason grocery stores don't wait until you fill your cart up and then jack up the prices as soon as you reach the register.

Oh, but they can do that now. I’ve been in grocery stores where they had ip-addressable e-ink screens for the price tags which updated regularly.

Back in the 80s and 90s ARMs were very popular in the US because interest rates were high, and the expectation was that they wouldn't stay that way forever. The rate increases had a lifetime cap, so there was a knowable upper bound.

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.

There is also a material spread between ARMs and fixed when the rates are high. When rates are low the spread compresses (same with rates between terms 15/20/30), making the additional risk questionable.

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.

Getting a 30y and paying off in 15 is a smart move. For our most recent house, that's we did set out to do, until the last refi (maybe 5 years in to the 30y) when we got a 15y and paid it off in 10 more years.

I used to think that, but i'm not convinced anymore. In the best case it is smart, but I've known too many people over the years that either died before they were able to enjoy the fruits of their investment, or by the time they were that old their body was such that they couldn't do anything without much pain.

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)

You bring up a great and different point. Is paying off early worthwhile at all? I agree with you that it's really not. Given a low fixed rate, paying off a mortgage early is almost never a good financial decision. Particularly with a lump sum. It's most people's largest leveraged investment. Better to keep the cash and the leverage working for you.

They keep the same rate for 3-5 years. Then you refinance, so they can't do anything. If rates are going up, they can't go up as fast as rates, though in general you should always refinance just before the adjustment.

I would say close to illiterate. I don't know what mortgages are like in other countries, but in the US you want a fixed rate or you want to rent. An ARM can really fuck you up.

> 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.

If you think you can predict the interest rates, you can make far more money in the financial market than what you can save with an ARM.

You have to do a lot better at prediction in most markets. The other the potential for change gets priced in, while with mortgage you can get todays rates while everyone knows how they will change.

> If rates are going down they are a great choice as you will refinance in a couple years anyway.

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.

Why? When I looked into it (about a decade ago), variable rates had paid less overall than fixed for every 10 year window over the previous 50 years. I always assumed people getting fixed rate were overleveraged and couldn't assume the rational risk of the variable.

Your statement makes me assume you're financially illiterate...

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.

Depends on what the rate is. If it's historically low at the time your take out your mortgage you might consider locking in that rate. I certainly would not have been better off with a variable rate, for one example.

Statistically, you're right - the variable rate is usually better. But that's also assuming that interest rates are completely random (which they're not) - a bit of market timing is wise to do here. And the spread compresses when rates are low, making the fixed more attractive then because the premium is lower.

Variable also makes a lot more sense with shorter timelines (either to sale or to early payoff).

Yale economist James Choi certainly doesn't strike me as financially illiterate, yet in his paper "Popular Personal Financial Advice versus the Professors", he finds variable rate mortgages to be a pretty good deal.

https://www.nber.org/papers/w30395

In the UK, a large percentage of mortgages are variable rate.

And they almost all have the early repayment penalty.

Early repayment penalty? That’s fucked. For once, I’m happy to see the US leading in this regard.

Banks set the fixed rate & they more than anyone else knows what will most likely happen to rates in the future because the banks are the ones in closed door meetings with reserve banks/government.

Do you think they'd set a fixed rate where they lose?

Between 2009 and 2021 ( low and decreasing interest rate regimes) ARM 3,5 or 7 year were a better choice to fixed rate mortgages.

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.

But 2007/2008 drove a number of people w/ these mortgages into bankruptcy.

It's a risk thing.

The 2007 housing crisis was primarily a subprime mortgage crisis.

ARMs are not the devil just as CDOs aren't the villain.

And extremely optimistic.

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