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Alan Greenspan On Adjustable Rate Mortgages
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Adjustable-rate mortgage loans are far better than fixed-rate mortgages and the time is right for millions of Americans to make a switch. This is the statement made by the Alan Greenspan, who was the Federal Reserve Chairman.
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Alan Greenspan is an esteemed and highly revered personality among the financial community. This opinion was vented out by him when he was delivering a speech to the Credit Union National Association Meeting in Washington.
According to Greenspan, many Americans have preference for fixed-rate mortgage loans. In a way, there are paying more than the required amount towards mortgage repayment. Fixed-rate mortgage loans allow homeowners to prepay their loan when the interest rates fall. However, this clause does not hold any importance when the interest rates start rising. Homeowners also pay a lot of money to get their loans refinanced. Greenspan feels that American homeowners feel assured about fixed mortgage payments every month. Another reason due to which American fixed-interest rate mortgage loans are unduly expensive is that these loans charge higher fees equivalent to 0.5-1.2 percentage points for providing protection against rising interest rates and also for providing the right to refinance. Such types of benefits are not available with adjustable-rate mortgages. In case of ARMs, households are constantly driven by the fear of adjusted interest rates causing payment shocks.
On the contrary, Greenspan feels that homeowners would have saved millions of dollars if they had opted for an adjustable rate mortgage during the past decade. This is because, the interest rates since 1994 have been on a strong downward trend. While the interest rate on ARMs was around 6 percent in 1994, it came down to less than 4 percent in 2006. Hence, if somebody has taken an ARM 10 years ago, there are very slight chances of increased mortgage payment every time the ARM rate was adjusted for the next 10 years.
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