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Seriously, adjustable mortgages not all bad

I think adjustable rate mortgages are great. I know that's an unpopular opinion these days with mortgage defaults stretching to the moons of Mars.

By James Thorner, Times Staff Writer
Published December 10, 2007

I think adjustable rate mortgages are great. I know that's an unpopular opinion these days with mortgage defaults stretching to the moons of Mars.

But who says you always have to swim in the American mainstream? I also like tasteful Christmas decorations, small cars and Dick Cheney.

Floating-rate mortgages are excellent tools if you don't misuse them. Thanks to them, I pocketed an extra $8,000.

Back in 2003, we refinanced the house with an adjustable rate mortgage of 4.5 percent. We had been paying nearly 7 percent. That new low rate was fixed for five years, after which it would float with the market.

But guess what? Our third child had come along, we'd be moving up to a larger house and we knew we'd be living elsewhere once the rate reset.

Over the next four years, it saved my family a badly needed $8,000. That windfall helped finance a down payment for a new car, summer vacations and other pleasures.

But not all adjustable rate customers - I include housing speculators looking for a Klondike strike - were rational.

During the housing boom, I overheard chats between mortgage brokers and borrowers. The dialogue seemed to run something like this:

Broker: "Forget the adjustable loan. Take a 30-year fixed. The rates aren't that different."

Customer: "I need adjustable. And don't make me pay closing costs. I know what I want and want what I know."

Broker: "But..."

Customer: "Are you working for me or not?"

Of course, with rate resets looming, many of those customers are screaming bloody murder. That's why the Bush administration took the extraordinary step last week to freeze what could be hundreds of thousands of adjustable-rate home loans for five years.

If the bailout helps those people blind-sided by bad luck, it's probably worth it. Consider my case. The market's so slow that if I had been forced to sell my old house this month to escape rising rates, I'd be stuck.

On the other hand, I can't help thinking that many mortgage defaults are good in the sense that a fever kills an infection. Sometimes you need to feel the burns to avoid future fires.

James Thorner can be reached at thorner@sptimes.com or 813 226-3313. Read his (Un)Real Estate at blogs.tampabay.com/realestate.

[Last modified December 7, 2007, 21:35:47]