How I Got Road Rage From a Radio Ad

July 25, 2011

Driving to Lake Tahoe last weekend, I heard a radio ad from a mortgage company going on and on about how we should call them immediately to refinance our fixed rate mortgages since the variable rates are dirt cheap right now.  It said, “You can save thousands of dollars in interest by switching to a variable rate loan,” and intimated that the bank was ripping you off by charging such high interest on fixed rate loans.  I did something very uncharacteristic of me and started yelling at the radio.  At first my husband thought I had a strange case of radio road rage, and I guess he is right.

It just made me crazy that this guy is giving out misinformation that is the total opposite of reality.  The truth is, fixed rates are low too and they have something precious to offer – a guaranteed rate for the life of the loan.  I was shocked at how ridiculous the concept was, but the way the ad portrayed it, made it sound like people were losing money on their current fixed rate loans and they would really be missing out if they didn’t switch.

Well here’s the other side of the story – just a few of the missing details:

Interest rates are at an all time low.  If you click here, and scroll down to the second chart from the bottom, you’ll see the rates for the 30 year fixed loan from 1971 to today. The lowest rates in the last 40 years were 2010 and 2011.  The highest rate was in 1982 and hovers above 18%.  Wouldn’t that have been a great year to buy a house?

Lock in your rate. Let me ask you a question.  When is the best time to lock in a fixed rate?  Would that be when interest rates are at historic lows we haven’t seen since World War II?  Well, that would be now, wouldn’t it?  The ad made no sense.  Most people with credit good enough to refinance have already done it and are at least close to the historic low.

Forecast where rates are going.  Interest rates can’t get much lower.  Why would anyone want to move to a variable rate loan when the chances are close to 100% that the rate will go up when the loan resets?

Do the math.  The current rate on a 30 year fixed rate loan as of June 24th is 4.5% and the current rate on a variable rate loan with a five year duration is 3.25%.  That is not much of a spread so there is not much savings year by year.  A rule of thumb in refinancing is if you can make up your fees within two years and plan to stay in the house for at least ten years, it is a good idea.  It depends on your situation.  If you are looking at refinancing, click here for a calculator to determine how long it will take to recapture your fees.

The only problem is that with a fixed and a variable loan, you aren’t comparing apples to apples.  In the radio ad, the mortgage company was promising there would be dollars saved, but with where interest rates are right now, it is very likely that in five years the rate will reset at 4.5% or higher resulting in little if no savings.  The likelihood is the cost would actually be higher if the rate went above 4.5%.

I can’t see a scenario where it would be a benefit to refinance now unless you have a higher rate loan or a variable rate loan, and you are going to a fixed to take advantage of this amazing once in a lifetime opportunity to lower your finance costs.  In terms of a variable rate loan, I would avoid them completely, and especially when operating a motor vehicle.