Fresh look at Fixed Rate or Variable Rate dilemmaTopic: Mortgage
Of course you know the options in mortgage you have to choose: fixed rate mortgage or a variable rate mortgage.
With fixed rate mortgage you are protected with any fluctuation in the interest rate movement for the term you have chosen. Mortgage terms are commonly 6 months to 5 years, and less commonly 7 and 10 year term.
With variable rate mortgage you have to move with the tide. Every time the bank announces a change in prime rate your mortgage rate will move up or down accordingly.
Fixed Rate or Variable Rate, that's the question.
It is probably wise to opt for fixed rate mortgage when the interest rate is at a low point. It is not an easy decision though because when interest rate is at a low point the variable rate is even lower and very attractive. And this will always be because variable rate is always below fixed rate at any given time for similar term. For the past several years the rate differential has been around 3/4 percent.
So what should you do?
You have to assess the movement of prime rate for the duration of the term which you plan to choose. For example if you are looking at a five-year term, what do you think prime rate will do for the coming five years?
If you think prime rate will go up significantly above 3/4 percent on average for the next five years, then it is better to go for a 5-year term fixed rate mortgage.
If you think prime rate will go down, even a little, or stay pretty much the same, then by all means choose the 5-year term variable rate mortgage.
In January 2002 prime rate was 3.75% and the 5-year fixed posted mortgage rate was 7%. The discounted 5-year mortgage rate was about 6% (around 1% below posted rate).
For the following five years (2002 through 2006) prime rate had climbed continuously reaching a peak of 6% in December 2006. The average prime rate for the five year period was 4.61%.
By choosing the 5-year variable rate mortgage in January 2002 you have saved approximately 1.39% over the 5-year fixed rate mortgage.
Toronto's York University Finance Professor Moshe Milevsky did a study of five-year rolling interest rate during the previous 50 years, and showed that 88.6 per cent of the time, homeowners would have saved money having floating interest rate mortgages, which are tied to the rise and fall of bond yields, rather than fixed-rate mortgages, which are usually locked-in over a period of one to five years. The average saving was $22,000 on a $100,000 mortgage paid out over 15 years"...... quote from Vancouver Sun dated April 3, 2007.
Variable rate clearly cheaper but not always and may be not for you. Make a right decision - use the help of a mortgage broker or your bank mortgage officer.
Please provide us with your opinion on this article:
I just closed my refi for 20 years at 4.25%. I have a very high Fico also. Rates are stirtang to go up. You can find ther rates on line from several different sources. Use a search engine.Here is a good one. Please note I am not endorsing google. This site just shows actual comparisons without entering personal info.
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