Why We’ll See Double-Digit Rates & Why ARMs Are A Terrible Risk

I’ve always loved ARMs. Some of my best friends are ARMs.

But ARMs – or Adjustable-Rate Mortgages – are just too big a risk in this economic environment (WAY TOO BIG!).

And this is why. ARMs adjust. By a lot.

Today’s ARMs are fixed for either five or seven years, typically with rates that are anywhere from 1/4 to 1/2% lower than today’s fixed rates.

And that is all well and good. But after those fixed periods end, ARMs can typically adjust up by as much as 5% or more – per the terms of the note.

If we stay in the current interest-rate environment, that is not a risk because borrowers can just refinance into another ARM or a fixed-rate loan when their fixed-rate period ends.

I just think it is way too big a risk to expect we’ll still be in the same interest-rate environment in five to seven years.

Expecting a similar rate environment for two to three years is a rational bet, which is why we are not averse to two- or three-year buydowns.

But, we often discourage ARMs because there is a very strong possibility that we’ll see double-digit rates in five years…

Why We Could See Double-Digit Interest Rates

Our federal debt is at a record 125% of GDP and is now growing faster than the economy because our deficits are so large.

What makes this even more concerning is the fact that our interest expense alone is now growing as fast as our deficits, already costing us $1 trillion per year.

We’re already printing money to service our debt, which increases inflation, which then increases interest rates.

As a result, our interest expense, our deficit, and our money printing will only increase, resulting in higher and higher rates – very likely to hit double digits before the end of the decade.

So, anyone taking out ARMs now will be faced with far higher rates when their ARM’s fixed rate period ends – and they will very likely wish they had taken a fixed rate loan when they could.

EDITOR’S NOTE:  This won’t actually happen because all that debt will be a drag on the economy, pushing rates lower.  And – there will be financial repression/yield curve control as well.  See George Gammon and WWII.