Roger Schlesinger

To begin with, I would. In fact, I have 3 variable rate mortgages on three different houses. I am using myself as an example because I want the reader to understand that what I recommend is generally something I will do for myself, first and foremost.

In a simpler explanation "I put my money where my mouth is." Variables are always around, but their popularity grows generally at times when interest rates are high, not when they are low. It is different this time because of an inverted yield curve making most variables as high or higher than fixed rates.

I believe that the inverted curve is about to adjust once the Federal Reserve signals that the raising of the interest rate, short term, is over and that the risk on interest rates will be to the downside, not the upside. So let's start examining variable rates in preparation. The major difference between fixed rates and variables is that a fixed rate is always fixed, or if it offers a lower rate to start, will have the exact formula in place before you take the loan. An example is a loan known as 2/1 buy down which allows the borrower to take a fixed rate, 30 year in this example, at a rate that is about 2% lower the first year, 1% lower the second year, and then a tad higher than a standard 30 year fixed for the remaining 28 years. The rates for this 2/1 buy down are currently in the middle 4% range for the first year, middle 5% range for the second year and middle 6% range for the remaining 28 years. A regular 30-year fixed, conforming loan is currently in the low 6% range.

Variables vary base on the value of the margin and the index which are added together on the change date. The borrower doesn't know what that will be until the change date. There are some variable loans that will have yearly caps, which only allow a certain percentage increase to protect the borrower, 1% every six months or 2% each year, but the borrower is still at a loss to know the exact rate until the change is made.

The big question is who would take these kinds of loans and why?

There are many answers to the question, but the favorite is a lower rate. Generally you can get a significantly lower rate by taking a variable rate loan.

Roger Schlesinger

Roger Schlesinger's Mortgage Minute is heard on hundreds of radio stations and daily on the Hugh Hewitt radio show and Michael Medved shows. Roger interacts with his hosts and explores the complicated financial markets in order to enlighten his listeners and direct them along their own unique road to financial freedom.