Based on what you presented, it does sound like the long term fixed rate interest only loans come at a premium that doesn’t make sense for normal investment returns. Of course there is always a higher rate where you break even. The question becomes: what is a reasonable expectation for an investment return over time?
What about ARMs? Can you see any case where getting an ARM might make sense? The problem is you have to be able to predict future rates with an ARM to see what your break even point is.
I know the rationale is that if the rates now are at historic lows, then the common man would predict it to be likely for rates to correct back higher towards more “normal” historic rates. That is especially true over the time frame we are talking about.
But then again, I realize that I am not as motivated or educated or experienced as the many wealthy investors who prefer ARMs as an “investment tool” and devote their time to figuring out how best to accumulate wealth.
The common man inside me screams that ARMs only make sense in an environment of lowering interest rates. Yes, the fixed rate loans come at a premium because you are paying the bank to assume the interest rate risk. I suspect the “knowledgable” investors who use ARMs probably take them with more indepth knowledge of the broader economy that allows them to feel comfortable taking on the interst rate risk personally.
I applied the “common man” theory to San Diego real estate back in 2003 when I almost bought a condo in Pt Loma. I decided not to gamble and keep renting. I kept thinking that I was likely the bigger sucker who would be left holding the bag, locking in someone else’s real estate winnings. I didn’t want to be the last one looking for a chair when the music stopped. Even though it turns out I would have made some money had I timed it right, I don’t regret it.
My conservative nature will probably keep my from ever doing the interest only or ARM thing. I guess that lack of risk taking will keep me from ever being wealthy as well.
