Finance and mortgage rate article review

Owning a home is one of the core tenets of the American dream. As of , nearly 64% of Americans owned their home indicating just how important this asset is to American culture. Fueling the recent rise in homeownerships rates are record low interest rates. These record low interest rates have encouraged a record number of Americans to engage within the homeownership process. Low interest rates allow more individuals to borrower for the purchase of a home. With lower interest rates, consumers can afford much higher home prices as their monthly debt service payments will be low. Likewise, those who already own a home are able to refinance their home if they are paying a higher interest rate to begin with. Each of these elements have fueled a very robust mortgage market that has persisted even throughout the pandemic.

As the article indicates, consumers chose mortgage rates in an effort to minimize costs and reduce their overall debt burden. A reduction of cost is seen as a benefit as it allows consumers to better service their mortgage payment in the event of an unforeseen event or life changing circumstance. Unfortunately, as the article indicates, many consumers have not conducted their full due diligence into certain, more esoteric financing structures. One such structure is that the adjustable rate mortgage. This product allows borrowers to pay a very low introductory rate for a set amount of years. After this initial grace period, the interest can balloon upwards based on a predetermined set of criteria. This criterion can vary, and if certain instances can cause the debt service payments to become unsustainable (Abrahams, 1997).

One observation that I found particularly interesting is the sheer number of products that are centered around the mortgage and how complex these products can be. As indicated, by the article, many adjustable rate mortgage products are so complex that a decision tree is required just to figure what the prevailing interest rate will be after the introductory period. The example provided in the article shows an ARM product that has interest payments that can vary from $664 all the way to $1193 depending on the criteria met.

The second observation from the article is that it is much easier to keep certain financial elements simple. Complexity, as indicated from the article causing individual to make very large mistakes that can have implications for the rest of their lives. In many instances, mortgages are for 30 years. Having a product that is complex and nobody understands can lead to financial ruin if left unchecked. As indicated by the flow chart in the article, monthly mortgage payments can vary rather dramatically with adjustable rate mortgages. As a result, it is much easy to use simpler products that are much easier to understand and digest internally. These simply products not only give consumers peace of mind, it also ensures that they have the product that is best suited for their individual needs (Alexander, 2002).

From the article, I learned that financial knowledge is not a discipline that should be outsourced to others. All individuals should look to learn and improve their overall financial acumen due primarily to its importance to the functions of their lives. Likewise, it is important to understand all the financial products a person uses. Although unrelated to the article, investments such Cryptocurrency and non-fungible tokens should be avoided if you do not understand the merits and nuances behind the product. Likewise esoteric financial products such as adjustable rate mortgages and others complex products should be avoided if you don’t understand their value as a purchaser.