This is probably one of the most popular questions in “mortgageland”, so I like to compare the options against the ever changing marketplace frequently throughout the year. As was mentioned in the last article addressing this matter, at First Foundation, we feel the real question is not which rate will save you the most money but rather which rate will allow you to get the most sleep. In other words, what’s your risk tolerance?
Even if you can save a bundle on the variable rate mortgage at the moment, if you’re personality or budget doesn’t allow for financial uncertainty, the variable is probably not right for you. Especially in the current market, the fixed rates are such a bargain, security has never come so cheap!
That being said, their are definitely “risk friendly” borrowers out there with consistent income, minimal debt and savings or investments to fall back on. If that’s you, the prime rate is still exceptionally low and is predicted to remain so for another 4 or 5 months, if not longer. After that time, the jury is still out on whether the prime rate will shoot up or creep up but there is a way to make the most of the variable while it’s low and protect yourself from a sudden increase – it takes discipline, but big saving can be had with this simple method.
Start with looking at the payment that you would be making if you went with the current five year fixed rate. In this example, let’s say your payment would have been $1500. Then, have a look at the payment that you will be making on the current variable rate. Let’s say that would be $1250. There’s a $250 difference there and that’s where the magic happens.
Instead of putting that in your pocket, you would arrange with your lender to take that $250 and put it down on your principle each month using your prepayment privileges. You’ll pay your principle down faster, save a bundle in interest AND you’ll be used to higher payments should the variable increase. Of course, should the variable rate rise drastically, you can always lock it in to a fixed rate to minimize the damage. However, keep in mind that you will be locking into the fixed rate of that day, NOT the variable rate that you have.
For more information about variable and fixed rates, contact one of our licensed mortgage brokers – we can help you decide which is most suitable for your lifestyle and financial goals.
Also, if you already have a variable rate mortgage, you may want to have a look at this great article – Rising Rates – Should I Lock In?