We frequently have borrowers request 15-year or 10-year fixed-rate loans in lieu of 30-year fixed-rates. They also often request ARMS, with 5 or 7 year fixed periods (before rolling to a yearly adjustable). We encourage 30-year loans instead.
We like 30-year loans for one primary reason: inflation. We think significant inflation is inevitable in light of all of the money the Fed is “manufacturing” with its various monetary stimulus plans.
If inflation hits double-digits in several years, (and we think it will), a borrower’s income will go up with inflation but his or her mortgage payment will stay the same. So, with respect to not getting a 15 year fixed, our point is to NOT saddle oneself with a high payment now in order to pay off a loan faster. One should instead take a 30-year loan, wait for inflation to set in and THEN pay off his or her loan faster with much less valuable and much more abundant “post-inflation” dollars.
This is what happened in the 1970’s. Many borrowers found themselves with much higher post-inflation income that they used to easily pay-off their low-rate 1960’s mortgages.
Inflation fear is also why we do not like ARMs. If an ARM adjusts in an inflationary environment, the rate will go immediately to the “Life Cap”. We think that this is very likely with all ARMs that have 5 and 7 year fixed rate periods.
Founder/Broker | JVM Lending
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