Most people are so focussed on just getting their mortgage in order to purchase a home they neglect to consider how important the setup of their mortgage is to their future needs. Many people are so concerned about actually qualifying that they are afraid of rocking the boat so they don’t ask any questions other than: “am I approved? Where do I sign?”

 

Most lenders have a number of comparable products that cover the majority of their clients’ needs.  However, the majority of people take the term with the lowest rate and are done. I have people come to me looking to renew, re-finance, transfer and find out that they can’t re-finance (only sell), or they can re-finance with a 6 month penalty. 

 

We all want the best interest rate. However, consider this.  Maybe you have just taken on a huge commitment of a mortgage that stretches your budget to the limit. You have chosen a 5-year term. So your mortgage renews in five years at whatever the rates are going to be then. Ask yourself, where are interest rates going to be in five years? Before you answer, consider the following. Over the past 60 years, the average five year rate has been between 9 – 11%. The only reason the rates are as low as they are now is because of 9/11. The day after the attack on the World Trade Center, interest rates dropped by 2%. Rates continued to drop until late 2005 when they seemed to have hit bottom. Then they started the predictable upward climb until the sub-prime mortgage collapse in the US in the summer of 2007. 

 

While the rates (prime) were dropping many people were choosing a variable rate. Why not? Take the advantage of a discount off already low prime and ride the market while prime and their interest rate drops, wait for a settling in the market and lock in at a fixed rate while the rates take their predictable upward ride. While the rates were rising the trend was to choose a fixed rate to protect against any future increases. 

 

Since the summer of 2007 the prime rate has been dropping and seems to have settled @ 4.75%. A variable rate of prime minus .60% is available (net 4.15%) A five year fixed rate is 5.49% now so the variable rate is the better choice. However, many people aren’t comfortable with the gamble. They would rather have a fixed rate so they know what their payments are going to be for the term. This brings up the question: “at the end of your five year term, how much are you still going to owe on your mortgage”…and “what is your renewable rate going to be. If you believe the balance owing is going to be considerable and the new mortgage rate will be much higher (let’s say even 7.5% to 8.5%) then you are going to be face with not much higher payments simply because you are paying more interest. That being the case, why wouldn’t you consider at least a ten year rate? Ten-year rates are available @ 6.30%. Over the first five years you will pay a little more but if the predicted increase in rates comes true you will save it and more in the last five years. On a $200,000 mortgage it can be as much as a $10,000 saving. Just in interest.

 

All the while this is going on you will still have the option of making extra payments to the principal (20% per year), portability (taking the mortgage and rate with you to the next home should you move) and assumability (a buyer can qualify to assume your mortgage). Both of these last options save you any pre-payment penalties and preserve your rate. Trust me, the time of mortgage rates in the 6% range are coming to an end.

 

How does this apply to your situation? Call me 250-564-9161, set up an appointment and I can run through the numbers that apply to you.

 

Next time? What are the tightening guidelines of the banks actually doing to the market?