Ask the Expert

by Dave Hershman10 Oct 2018

Because rates have risen, I expected that more of my clients would opt for adjustable rates this year. And though I have originated more adjustables this year, the vast majority of my clients still are sticking with fixed rate loans. Do you expect adjustables to get more popular in the future? —Henry from South Carolina

I have to start my answer with this caveat: I don't predict the future. Generally, the use of adjustables will increase as rates rise, and if rates continue to go up, I would expect the answer to be yes. But I can't say with certainty that rates will continue to rise. I will address the question as to why adjustables are not as popular as some have predicted.

There are several reasons for this phenomenon:

  • Our population came out of the housing and financial crisis more conservative. Adjustables received a lot of bad press during the crisis--and even though today's adjustables are a lot safer, that does not mean that the average homebuyer is educated regarding this fact.
  • Short-term rates have been rising faster than long-term rates, and that that means that the spread between short-term adjustables and fixed rates have been narrowing. Long-term adjustables are not as affected by this trend.
  • Even though rates are rising, they are still historically low. In the past, when adjustables were more dominant, rates were much higher than they are today.
  • Homeowners are moving less often today. In the past, homeowners felt they would be moving again in five years or less, making adjustables a better choice. —Dave

Dave Hershman has been the leading author and a top speaker for the industry for decades with six books authored and hundreds of articles published. His website is www.originationpro.com. If you have a reaction to this commentary or another question you would like answered in this column? Email Dave directly at dave@hershmangroup.com.

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