The homeowners have enjoyed a long period of low interest rates.
To say it has been a great ride is an understatement, however there
does seem to be a trend towards increasing rates. The question is, "What
should I do now?"
The prime lending rate, which is used for variable mortgages, is at
3%, with current pricing for variable mortgages below prime, ranging
from 2.15% to 2.85%. I will use 2.50% for variable rates as it is close
to the median. Let's compare that to the 5-year fixed rate, which is
currently at 4.14%.
Currently there is a variance of approximately 1.64% between fixed
and variable. So, each day, week, or month that goes by, your cost of
borrowing is dramatically less. There is also the opportunity cost,
which would be the difference between your payments for fixed or
variable. Take for example a mortgage for $200,000 on a variable rate
the payment is $897.23 per month, versus the 5 year fixed rate at
$1,067.27 per month. So, what can you do with the $170 difference every
month? That could cover date night and a babysitter or a couple of
rounds of golf. Hmmmm.
Can rates increase and diminish the variance between the terms? Yes,
they can. The questions we don't have an answer to is how long will it
take to equal the fixed rate, and where will rates go.
What we do know is that there have been studies over the last 15
years which show that less interest is paid with a variable rate
mortgage than a fixed rate. That being said, I still go back to the
nature of the individual. What is your comfort level? Can you sleep
soundly at night with a variable rate, or do you need the fixed rate?
There are other methods to reduce the principal of your mortgage
without taking a variable rate mortgage, contact your local mortgage
specialist to sit down and discuss your options.