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The Carrot

May 28th, 2010 at 07:27 pm

The Carrot, what does that mean? Well I got a call from a good friend of mine who is currently looking to buy a house. The interest rate they gave him was 4.65% with a 1/2 a point. That is a good rate but then they said "Hey, we could give you an 7/1 ARM with a rate of 3.75%". Wow, that is a full point lower. Who wouldn't want that? That bank they are really nice. But are they?

Now that you have that "Carrot" in front of you why not take the savings. Well in my opinion the only way you should take that is if you plan on selling your house within 7 years or you can use that saved money in a much more lucrative investment. Maybe your income is low at this time but you are betting that it will increase a good portion over the next few years. The rates are so low today one would believe as the economy recovers over the next year or so the rates will only increase. When it comes time to refinance after seven years or take their new adjusted rate you are most likely going to erase the savings from such a low rate today.

The bank did not volunteer what the new rate would be; prime +2, prime +5. He had to ask them. It is the old adage that if it is to good to be true then it is. Needless to say my friend made what I feel to be the correct decision and took the 4.65%.

4 Responses to “The Carrot”

  1. NJDebbie Says:

    I always think of the "what ifs". I think your friend made a wise choice (15 year mortgage would have been better). People need to keep in mind that sometimes plans do not turn out how you think they will. I could never go for a 7/1 year ARM!

  2. Jerry Says:

    No kidding! That carrot is attached to a stick, and the bank will not hesitate to beat you with it at the end of the ARM. We have had friends lead themselves into very dire straits because of an ARM, and we were so glad that we took out a standard mortgage, albeit at a (slightly) higher initial rate. There's no insurance for which way the rates will go, and an ARM can bite you hard.

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