Here We Go Again! Adjustable Rate

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By PETER ROSENTHAL, President
V.I.P. Trust Deed Company
August 2003

We have now experienced the first, sharp, increase in Interest Rates in several years. For all practical purposes interest rates have risen approximately 1% in a 30-day period. Well, here come the “hucksters” again.

Fixed interest rates have been so low that there has been virtually no market for adjustable interest rates. It made no sense (in most cases) to get an adjustable when long-term fixed rate loans were at 5.5% or, perhaps, a short term (3-5 years) fixed rate at 4.5% to 4.9%. The rise of one percent has again brought out the “bait and switch” crowd. If you fall for this “teaser rate” crap you will have lost sight of the fact that long term, fixed interest, under 7% is still cheap, cheap, cheap.

This article was prompted by a radio ad I heard the other day with an interest rate 1.95%. This ad took me back almost 40 years when variable interest rates (VIR’s) first appeared in the mid 70’s. I wrote column after column about teaser rates and horrible lending practices. Believe it or not most of my columns started with “I have a lender who will lend money at 1.95%,” I’m not kidding! I used that figure as a RIDICULOUS interest rate. It was ridiculous 40 years ago and it is ridiculous today. It wasn’t true then and it isn’t true now. In the seventies I followed up my 1.95% offer with the caution that this was a variable interest rate but, DON’T WORRY, the rate can only change ONE TENTH OF ONE PERCENT per adjustment period.

I then went on to explain that the adjustment periods were DAILY. Adjustable rates are a clever way for the lender to entice you with an ARTIFICIAL low monthly payment. In some cases the lender knows that you really can’t afford the loan (at fixed rates) so with a little “liars can figure, and figures can lie” magic the lender can qualify you for a loan that you really don’t qualify for. The theory behind this is that you will get a raise in the future and be miraculously able to pay the higher payment that you can’t pay today. Okay, are there any valid reasons to get an adjustable loan? Certainly! The most obvious reason is to apply for a variable loan on a property that you will only own for a year or two. Yes, in that event, the qualification will be easier and the payments, including adjustments, should be lower than a long-term fixed interest loan. On the other hand there are many FIXED (short term) products available at very low rates. An example might be an adjustable, 30-year loan, at a FIXED interest rate for the first three years. This type of loan also has a lower then normal interest rate.

Please realize, as I write this column, in August 2003, we STILL have fixed interest rates lower than any time during my 30 year real estate career, excepting the last few years. Maybe I can sum this up another way. If you are a high roller in Vegas, go for the variable. If you are more conservative, like this author, stay with the good old fashioned: FIXED RATE LOAN.

Peter Rosenthal
VIP Trust Deed Company