If the Fed Lowers rates again ....

[1ntCobra]

When I single, I bought a small house that I figured I would eventually move out of and started off with a 7 year balloon mortgage. But I was still there at 7 years, so I figured I would be out pretty soon and got a 3 year ARM, with the first rate change not scheduled for 3 years. By that time I was married and figured kids would be on the way and I would be out again before the 3 years was up, so the 3 years at a low rate sounded good. But I ended up staying for another 4 years instead. I was convinced that I was going to get messed up when the ARM rate changed, but it was 2002, and guess what, my mortgage payment went down.

So alternative mortgages like balloons and ARMs have worked out for me in the past to save a few bucks, but I agree getting in on an ARM with mortgage rates at historic lows would worry me. That worry, plus the idea that I was planning on my second house being a long term thing, made me choose a 30 year fixed rate loan.

The interesting thing about the ARM that I got was that even though the rate for that loan was lower than the fixed rate, I think they still made me qualify for the ARM as if I was taking out a 7% fixed rate loan. I guess they figured that I would have to be able to afford some rate increases down the road. If people are getting themselves into such trouble, I wonder if the banks at some point stopped making people qualify for a higher fixed rate like 7% when applying for the ARM? Or maybe they lowered that 7% bar to something much lower.