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TR U M P STR A TEGI ES FO R R E A L ESTA TE

to take. It is important for your peace of mind to know your home is
never in jeopardy.

Fixed-Rate versus Variable-Rate Mortgages

With a fixed-rate mortgage, you know what your payments will be
from the day you placed the mortgage to the day it matures. You
don’t know what your payments will be with an adjustable rate mort-
gage (ARM). Banks often entice borrowers with a low interest rate
on an ARM to start with but you’re really subject to economic
changes over which you have absolutely no control. If you think a
variable-rate mortgage is for you, try to negotiate for a “cap” (i.e., the
maximum interest rate you will be required to pay). If, for example,
you take out a 5.5 percent loan with a cap of 8 percent, the interest
rate on the loan can never go above 8 percent. Even if this protection
costs something, it’s usually worth it. If, in exchange for giving you
a cap the bank insists on your agreeing to a “floor” (i.e., the lowest
rate of interest the bank will receive), the added protection is still de-
sirable if the loan has a duration of more than two or three years.
The only time a variable-rate mortgage may be better than a fixed-
rate loan is in the very short term, say three years or less, if it allows
you to take advantage of a low initial “teaser” rate, which usually
takes about three years to be adjusted upward. If you intend to own
your house for the long term (i.e., more than three years) then a
fixed-rate loan will let you sleep at night.
As I write this book, I am certain there are many home owners
succumbing to the lure of a long-term variable-rate mortgage with a
very low rate of interest for the first year. We in the United States
are spoiled because our rate of inflation has been low for so many
years. The rest of the world hasn’t been so lucky. Some countries

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