General

Re: Help me give good advice: Adjustable or fixed rate loan?

Smiling Dave — Wed, 15 Feb 2012 23:11:21 GMT

ty gotlucky

have a look at my blog

Re: Help me give good advice: Adjustable or fixed rate loan?

gotlucky — Wed, 15 Feb 2012 21:59:02 GMT

@Smiling Dave

I just wanted to say that your post laying out your argument is excellent. I like the style and format (the information and argument are good too :p).

Re: Help me give good advice: Adjustable or fixed rate loan?

Smiling Dave — Wed, 15 Feb 2012 19:51:39 GMT

TY, onebornfree, for posting your souces.

OK, we need not argue. I leave it to the reader to see that both sources say the oposite of what you claim they do.

Regards,

Dave

Re: Help me give good advice: Adjustable or fixed rate loan?

onebornfree — Wed, 15 Feb 2012 19:30:44 GMT

SD: "Who told you that? In other words, a source please."

" When the businessmen finally learned that the boom created by credit expansion cannot last and must necessarily lead to a slump, they realized that it was important for them to know in time the date of the break. They turned to economists for advice.

"The economist knows that such a boom must result in a depression. But he does not and cannot know when the crisis will appear. This depends on the special conditions of each case. Many political events can influence the outcome. There are no rules according to which the duration of the boom or of the following depression can be computed. And even if such rules were available, they would be of no use to businessmen. ....."

Taken from: "Human Action": XXXVIII. THE PLACE OF ECONOMICS IN LEARNING -3. Forecasting as a Profession

Regards, onebornfree.

P.S. I'm not looking for an argument SD. If you believe that you _can_ accurately predict future economic events, then have at it, and more power to you!

Re: Help me give good advice: Adjustable or fixed rate loan?

Smiling Dave — Wed, 15 Feb 2012 18:52:19 GMT

Since human action theory reveals that no one [not even the banks] can reliably, consistently predict future economic events,

Who told you that? In other words, a source please.

no one [not even the banks] can reliably, consistently predict future economic events,

All we have to do here is predict one economic event, one time. That there will be inflation. No need for reliably and consistently predicting events [=plural].

human action theory reveals that no one [not even the banks] can reliably, consistently predict future economic events,

What I don't get is, if we assume you are correct here, then why bother studying economics at all? If the bottom line is "you can't predict anything" doesn't that mean "close the books and turn on the basketball games"?

Here is my take: Human action theory teaches that...

1. ...there is a cause and effect relationship between economic events. There is a Law of Supply and Demand. There is a Theory of the Business Cycle. There is a Law of Diminishing Returns. And so forth. And although all the laws assume ceteris parebis [=all other things remaining unchanged], and in the real world everything changes, yet ...

2...some causes are way more powerful than others. As an extreme example, Obama deciding to invade Iran influences the economy more than me buying a dozen eggs.

Of course, Economics per se limits itself to if-then statements. If the Fed prints more money, then all other things being equal, prices will go up. An economist, while wearing his economist hat, will not consider it his job to predict whether the Fed will indeed print more money or not. All he discusses is the consequences of what happens if they do or they don't.

Thus a whole new field of knowledge is introduced when trying to predict economic events, what we may call psychology. What kind of people run the Fed? What have they done in the past, what are the likely reasons they acted the way they did, and is there reason to think they will act that way in the future? Obviously, this whole area is more an art than a science, though the theory of human action gives us a bit of a hint. They will probably do what they percieve as best for them.

All of the above leads me to conclude that...

3... though nobody is likely to be perfect, some people will be far better at predicting future economic events than others.

Summing up. The uncertainty we all have is in predicting what people will do. And there is uncertainty as to how much influence their action will have on the future. But...

4... there is no uncertainty about the direction of the influence of past actions on the future.

For example. We do not know for sure if the Fed will print money tomorrow [though shrewd people can make excellent guesses]. We do not even know for sure if the money printing that causes prices to rise, ceteris parebis, will be offset by other factors, leaving prices the same or even lower. But we do know for sure that yesterday's money printing by the Fed will introduce a force which will push in the direction of higher prices. We also know that the more money printed, the stronger this force will be.

Now let's look at what is before our very eyes. Fifty years ago, politicians and economists all agreed that inflation was bad. It was even considered a given that printing money caused inflation [See Keynes remark about debauching the currency]. Nowadays, things have changed. Every single politician with power anywhere in the world, and every single economist with access to the media or with any other power, lets it be known that inflation is a good thing, and that besides, printing money doesn't cause prices to rise, and that besides, the central banks do not really print money, and that besides we never did have inflation, really, ever. In other words, they are announcing for all the world to see that they intend to print money till prices go up. And they have done it in the past.

One doesn't have to be an Albert Einstein to make the following argument. They have printed money in the past. The have the power to print more, and announced their intention to do so, telling everyone how wonderful it is. Ergo,

5...the probability of their printing more, so much that prices will keep on rising like they announced is their intention, is enormous. Protect yourself.

Re: Help me give good advice: Adjustable or fixed rate loan?

Minarchist — Wed, 15 Feb 2012 17:49:23 GMT

If I had to borrow, I would borrow at a fixed rate. Rates can't drop much more, so I wouldn't worry too much about missing an opportunity for a lower future rate, and though I doubt they'll rise meaningfully (because States will keep suppressing them), why take the chance? An adjustable rate loan right now strikes me as all-risk and no-reward.

Keep in mind also, if you plan for inflation to "pay down" your loans, you have to either own an asset that will keep up with inflation, or have an income that will keep up with inflation. If you have no job and no hard assets, inflation is the worst environment in which to be a debtor: i.e. your income stays the same and your living expenses rise.

Re: Help me give good advice: Adjustable or fixed rate loan?

onebornfree — Wed, 15 Feb 2012 17:25:50 GMT

Fixed or Variable?

Taking out a fixed rate loan because a borrower believes that the money paid back per unit will be worth less than the money borrowed, is essentially a prediction of future inflation, using the money borrowed as a "surefire" bet on that occurrence.

A truly variable rate loan however [most are not- you have to check the fine print], is not an attempt to predict future economic events and remains neutral in economic outlook, which makes it far more "user friendly" if instead, systemic deflation hits, when each unit of currency that the borrower must pay back is worth more, not less, and where a fixed rate might cause severe distress to the borrower

Since human action theory reveals that no one [not even the banks] can reliably, consistently predict future economic events, [therefore further future deflation is still a distinct possibility] the question for your borrower appears to be : "Do ya feel lucky, punk?"

Regards, onebornfree.

Re: Help me give good advice: Adjustable or fixed rate loan?

TANSTAAFL — Wed, 15 Feb 2012 16:29:56 GMT

Advise the fixed rate. I would also advise to take the loan for an amount that the monthly payment is lower than what canbe afforded. The rate can effectively be lowered and loan paid off much sooner if more than the required payment is made each month.

The variable rate seems nice because it lowers the monthly payment. The risk is that the rate rises and your 300 payment becomes 1,000. It is more likely than not that at some point in the next 10 years the holder of the adjustable rate loan will face a rising rate and lncreasing payments.

Tha bank does not want the fixed rate loan because it expects inflation. Inflation helps the borrower at the expense of the lender. The money the bank recieves in payment has less purchasing power, is less valuable, than the money it lends out.

Re: Help me give good advice: Adjustable or fixed rate loan?

Chyd3nius — Wed, 15 Feb 2012 12:26:55 GMT

If inflation hits(I think it's going to hit both in EU and USA at some level in few years) then the real value of your debt will get lower. Fixed interest rate loan is best one in inflation, because inflation rises interest rates and you are safe from that, but rising prices and wages will make your real debt smaller.

Re: Help me give good advice: Adjustable or fixed rate loan?

Adam_Just — Wed, 15 Feb 2012 12:26:05 GMT

Loans with a fixt rate will be more expensive everywhere, because all the economies in the world (except for Asian countries perhaps) are in bad economic conditions and projections. So the banks cover their future potential risks making fixed rates higher and loans more expensive. That's rather normal, because I think the economic situation in many countries doesn't have very positive scenarios of development.

But the decision also depends on other factors, maybe subjective ones..

Re: Help me give good advice: Adjustable or fixed rate loan?

Marko — Wed, 15 Feb 2012 12:03:18 GMT

Thanks all. I'm going to advise a fixed rate. I hate that the terms are as they are when they used to be considerably better, but that just means the banks themselves are now aware inflation is coming, and since I knew that before they did, what do I have to be uneasy about. It may take longer to pay off but in 15 years time 400€ won't be as nearly as hard to lay hands on as it is now, so it is not *that much* of a factor.

Of course, what you did now is to make me a debt enthusiast and half set my mind on getting a cash loan for myself to buy physical gold, or some gold index with it. I'm going to have to sleep on this, lest I do something stupid, but it seems intriguing.

Re: Help me give good advice: Adjustable or fixed rate loan?

Clayton — Wed, 15 Feb 2012 09:17:46 GMT

Fixed rate unless you are in the business of interest-rate speculation. If you can't afford the fixed rate, then you can't afford the loan. Don't take it out.

</thread>

Clayton -

Re: Help me give good advice: Adjustable or fixed rate loan?

Chyd3nius — Wed, 15 Feb 2012 07:14:35 GMT

When inflation hits, interest rates rise. If you expect inflation, then fixed rate is a good one. And about inflation, it depends do you live on EU or in USA.

Re: Help me give good advice: Adjustable or fixed rate loan?

John James — Wed, 15 Feb 2012 05:29:15 GMT

Smiling Dave:
I dunno. You hear stories about prostitues with hearts of gold, but never about bankers.

What about badass mail clerks and logical forum posters?

Re: Help me give good advice: Adjustable or fixed rate loan?

Smiling Dave — Wed, 15 Feb 2012 04:21:34 GMT

Let me make sure I understand. You are considering the option of letting the bank, for 15 years in a row, decide how much interest they will charge you, with no limitationon them. If you don't pay every month to the last dime, you lose your house.

Maybe this might make sense, entering a gambling situation like that where you are powerless and at their mercy, if two conditions are met. First, that the down payment you made is a trivial amunt, so that the worst case is you lose that trivial amount when they take your house away. Second, that the initial monthly payments, until the time comes for the banks to decide how much to charge you for the future, is more or less the amount you would pay to rent such a house.

If those two conditions are met, then basically you are renting the house for now, and when they reset the amount, you can walk away and hand them over the keys if it is too much for your liking [after perhaps first stripping the house of every possible item of value, the fixtures, the pipes, everything. After all, it's legally your house till they kick you out, right?]

Bottom line, if it pays to consider this whole thing just a way of renting the house until they want too much rent, then I guess there is something to talk about. But if you stand to lose a bundle when they take away your house, and so you are relying on them being reasonable when the time comes to up the interest rate, I dunno. You hear stories about prostitues with hearts of gold, but never about bankers.