Comments on: Greenspan, here is what you said before.

By: Frugal

Frugal — Mon, 01 Oct 2007 13:22:49 +0000

Rick,
At other times, I would have agreed with you that ARM could have been a better choice. But making such comment when the long term interest rates were at historically low (in 20+ years), and also when the housing bubble froth was quite clear at various regions, is simply irresponsible from a Fed chairman.

By: Shadox

Shadox — Wed, 26 Sep 2007 20:34:08 +0000

I am so tired of listening to former officials bitch about the Bush policy. It’s not that I think that they are wrong when they blame him for getting us into a deep hole, it’s that I can’t help but wonder why it is that they waited until they left office before they spoke up. Isn’t it the job of a good official to point out the errors and correct them while he is still on the job? What is the point of saying “I knew that” if you did not act on your supposed knowledge or even acted counter to that information.

Seriously Washington folks: Stop selling us books, start getting policy right.

By: Novice

Novice — Mon, 24 Sep 2007 18:36:49 +0000

I think the moral of the story is to ignore the noise surrounding central banks and focus on what the market is doing. Sure the market may have jumped last week, but no one will remember that if the secular bear market becomes apparent in the next two months.

By: Rick

Rick — Mon, 24 Sep 2007 14:43:55 +0000

Actually, Greenspan is correct in that ARMs can be a better deal. Note that there is a difference between the regular ARM and the negative amortization ARM you’re talking about. Most ARMs are not even subprime mortgages at all. And mant ARMs are actually so-called hybrid ARMs whose interest rate is fixed for a few years and then variable for the remainder of the loan term.

Here’s why these are actually a better deal in many cases. The average homeowner only keeps his loan for seven years or less. By this time he has either refinanced or moved. So if you only expect to stay in your home for seven years, you ought to get a 5/1 or a 7/1 ARM. Rather than paying a fixed 6.0% interest rate for 30 years, you could pay a 5.75% rate for 5 years; after this point it becomes adjustable. You’ll save quite a bit of money for these 5 years in having a lower interest rate. For the remaining 2 years you’ll stay in your home, you may pay a higher interest rate, but most likely you’ll still come out ahead. If you get a 7/1 ARM, this won’t even matter at all, as the lower interest rate will be fixed for the entire time you stay in your home.

Sure there’s some risk, as you never know what will happen in the future. Nobody knows what interest rates will do in the future, and nobody knows exactly how long they’ll stay in their home. But on average, having an ARM actually works for you, and you pay lower interest costs during the time you stay in your home.