Why People Avoid Discounts When Buying Financial Products

Holden Lewis of BankRate.com coincidentally ran a story about people who are moving from ARMs to Fixed product the very same day I talked about.

Give the article a read -- Holden covers some key points of those in the opposite camp.

I read Holden's piece twice and it seemed so, well, logical.  I mean, who would want to be at the market's mercy when their adjusting mortgage begins to adjust -- even if that adjustment isn't for another 40 months?

After all, the opportunity to wipe that risk out is available right here, right now.

Sure, there is a cost in switching to a fixed rate -- you get a higher monthly payment and costs to close your loans -- but it's worth it.

Or, is it?

See, I am thinking about my weekend plans. This weekend, I plan to do some shopping. And guess where I'll do some shopping? At stores that are having a sale.

If I am going to buy something, I am not going to buy it at full retail and that is truly the behavior of a rational shopper.  Think about all of the things that you buy December 26 every year because it's a great "deal".  That makes sense to all of us.

For strange psychological reasons, though, people behave in the exact opposite fashion with respect to financial instrument shopping -- they are irrational and avoid discounts!

We all know the adage -- Buy Low, Sell High. And yet, most people do the exact opposite. When stock prices are high, they buy. When stock prices are low, they sell.

Holden's article highlights some terrific reasons for moving to a fixed product including the classic "I want to sleep at night". There is certainly merit in feeling safe and protected in a changing interest rate environment, and I wholeheartedly recommend that my clients make decisions based on their individual comfort level.

I also recommend that they weigh all of the facts, though, so that a "comfort level decision" is really just another term for an "informed homeowner decision".