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Predicting Interest Rates

All the logicians out there are probably commenting that the choice between an adjustable-rate mortgage and a fixed-rate mortgage is simple. All you need to know in order to make a decision is the direction of interest rates. It's only logical. When interest rates are about ready to rise, a fixed-rate mortgage would be favorable. Lock in a low rate and smile smugly when interest rates skyrocket.

Conversely, if you thought that rates were going to stay the same or drop, you would want an ARM. Some real estate books that we've read even go so far as to say that your own personal interest-rate forecast should determine whether to take an ARM or fixed-rate mortgage! "Interest-rate forecasts should be the major factor in deciding whether or not to get an ARM," argues one such book.

You are not going to figure out which way rates are headed. The movement of interest rates is not logical, and you certainly can't predict it. If you could, you would make a fortune investing in bonds, interest-rate futures, and options.

Even the money-management pros who work with interest rates and bonds as a full-time job can't consistently predict interest rates. Witness the fact that bond-fund managers at mutual fund companies have a tough time beating the buy-and-hold bond-market indexes. If bond-fund managers could foresee where rates were headed, they could easily beat the averages by trading into and out of bonds when they foresaw interest-rate changes on the horizon.