Thursday, February 16, 2012

Why Variable Rate Mortgages Are Best-[or "Do Ya Feel Lucky, Punk?]"

An interesting question recently came up at an internet forum I sometimes read, regarding the advantages/disadvantages of fixed or variable rate bank loans. Here is the original question as posted:

"If you were forced at gunpoint to take out a loan now what kind it would be?.......
........Normally I would not be in doubt at all, I would say go for a fixed rate. However, normally you could get a loan on decent terms, so by going in for a fixed rate you would be locking in a decent interest rate. But with loans so expensive now and the banks particularly hostile to fixed rate loans, going for one sounds a lot like paying extra to lock in a high interest rate."


The questioner then goes on to list current examples of both fixed and what he/she believes to be variable rate loans . Source




"Do Ya Feel Lucky, Punk?"

Onebornfree Commentary: Why Variable Rate Loans Are Probably Best

Taking out a fixed rate loan because a borrower believes that the money paid back per unit will be worth less than the money borrowed, is essentially a prediction of future inflation, using the money borrowed as a "surefire" bet on that occurrence.

A truly variable rate loan however [most are not- you have to check the fine print to be sure], is not an attempt to predict future economic events and remains neutral in economic outlook, which makes it far more "user friendly" if instead of inflation, systemic deflation hits, when each unit of currency that the borrower must pay back is increasingly worth more, not less, and where a fixed rate might therefor cause severe financial distress to the borrower.

Since human action theory reveals that no one [not even the banks] can reliably, consistently predict future economic events, [therefore further future deflation is still a distinct possibility] the question for the fixed rate borrower would appear to be :"Do ya feel lucky, punk?"

Regards, [and happy borrowing!] Financial Safety Services.

DISCLAIMER:

Financial Safety Services is NOT an investment advisory service. Financial Safety Services is an educational service that teaches the interested individual non-original [i.e. invented by others far more intelligent than myself], time-tested safe methods/principles that might be successfully used by the individual for relatively low risk speculations in various financial markets.

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Financial Safety Services is a private , mostly off-line, international, person to person consulting service that attempts to show its real-time [i.e. non-internet derived] clients how to speculate safely with money that they can afford to lose. Money that the client cannot afford to lose should never be risked in these speculations

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