Friday, July 27, 2007

Fixed rate mortgages vs ARMS

Floyd Norris's NYT column today is good:

http://select.nytimes.com/2007/07/27/business/27norris.html

I have long held a view that hosueholds should look at themselves as financial intermediaries, and match the duration of assets and liabilities. Houses are an asset of long duration, and as such, have values that are sensitive to changes in interest rates. Thus people who plan on living in a house for a long time should match it with a liability that has long duration--a long-term fixed rate mortgage.

If people know they will be in a house for five years, a hybrid 5 year ARM is fine. But it all cases, households should make sure they can afford a house based on a long-term mortgage before they buy. If the only thing that gets them into the house is a variable rate interest only loan, they are looking for trouble (FWIW, these thoughts occured to me at the time Chairman Greenspan was recommending ARMs to people in 2004).

1 comment:

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