what kind of mortgage to get??

[Tjalfe]

I ahve to decide on the mortgage for the house we are buying by tomorrow... fixed rate or variable rate.hmm...
the offers we have gotten so far:

Fixed rate 5 year term, 4.85%

Fixed rate 10 year term, 5.8%

variable rate 1 year 3.25%

The prime interest rate in Canada is now at 4%, which is very close to the lowest it has ever been, and the mortgage rates are tied into this rate.

Should I pick fixed for peace of mind?

Should i pick variable to save cash, hoping the prime rate does not sky rocket?

I am not sure.. This is my first mortgage ever

[GT98]

They dont offer a 30 yr loan? Just curious. I would get the fixed term IMO

[agallag]

Historically, even through the crazy interest rates of the 70s-80s, variable has always been the mathamatically better option.

[rylan]

How long do you plan on keeping the house?

[Jammrock]

There have been a lot of warnings about variable rates, because rates are so low now and are bound to go up. Mainly becasue most people don't anticipate how much rate hikes will change their mortgage payment...

The recommendation I've been hearing (and I refi'ed earlier this year) is to get a 5- to 10-year fixed at a low rate. The theory is, with the fixed lower rate your payment is smaller so you can, if disaplined, pay off extra principle. Once the term is up you either 1) move, 2) refi at a 10-15 year standard mortgage rate. 10-15 year rates are drastically lower than 30-year rates, which means you'll keep a low rate and a low payment for the full length of the loan (and pay it off faster than a traditional 30-year).

Jammrock

[Tjalfe]

I plan to keep the house for the forseable future, but who can really predict the future that way. probably at least 5 years.

With the variable rates, how quick can they go up?.. in 5 years time, would the 3.25% variable have reached more than the 4.85%?..

These rates are based on 25 year amortization, where we plan to pay extra to bring the amortization period down, but giving us a smaller minimum payment, if we for whatever reason are shy on cash.

[schmosef]

Rylan asks an important question.

As I mentioned in the other thread, I'm working on a site for a mortgage refi company so I know a few basic things-I'm no expert though.

First, the average time someone holds a house is eight years. And people tend to move several times before they find the house that they stay in long term. So it doesn't make sense to burden yourself with a high monthly payment when you start out because most of the money goes to interest.

The industry has been warning that interest rates are going to go back up for like 10 years. The banks are really hoping for this because they want to make more money. They don't offer 25-30 year mortgages at a competitive rate because they don't want people to be able to lock in over the long term. The government knows that we'll hit a major recession if the interest rates go up too fast so there are a lot of factors at play to keep things close to where they are.

So it's basically a gamble. You have to decide based on how much cash you expect to have available each month and into the future and a realistic understanding of how long you plan to stay in the one house.

One strategy is to go with a low interest rate but budget each month as if you were paying a higher rate. The excess money gets put into an account that you keep for a rainy day and you are prepared if the rate goes up when you renegotiate.

What a lot of people do is pick up a variable rate mortgage with the option to lock in for 5 years at any time. Try to have one of these quoted.

It's a hard call. I'm selling my condo this year (no mortgage, I inherited it) and buying a house for which I know I'll need to get a $100k-$200k mortgage. I plan to get variable rate with an option to lock in. My strategy is to keep my payments low because I intend to move a few times over the short term.

If you haven't figured it out yet, there's no one solution to fit everybody. And even an individual solution has too many unknown factors to be fool proof. I believe the rates will stay low for the short term because the American economy is getting stronger and that only helps our currently stable economy in Canada. Over the long term, it's anyone's guess. But that's just my opinion. Be very wary of a professional (ie, broker, banker) who tries to tell you he knows for sure what the best strategy is. Remember all those "pros" who predicted that the internet economy would boom forever? Where are they now?

[agallag]

Originally posted by tjalfe
With the variable rates, how quick can they go up?.. in 5 years time, would the 3.25% variable have reached more than the 4.85%?..

The rates would have to go up more than that before you lose. If the rates went up over 4.85 within the first six months or so, then sure, you will have lost a little. That's very unlikely though. Rates are more likely to go up slowly. As long as the average rate over the 5 year term is below 4.85, you're laughing.

Also, you're better off having a lower rate early on, when your principle is highest, and your payments are mostly covering interest.

It's always going to be a bit of a gamble going variable, but the odds that the rates will go up that fast are pretty slim.

[agallag]

One strategy is to go with a low interest rate but budget each month as if you were paying a higher rate. The excess money gets put into an account that you keep for a rainy day and you are prepared if the rate goes up when you renegotiate.

That's a very good recommendation. I second it

[Dr Mordrid]

If the difference between short term and long term were less than 2-3% I'd lock the rate in for as long a term as possible. Why? Because most of you are too young to have a historical perspective.

You never know when there will be another oil crisis (a protracted conflict with Iran could do the trick) or a US President like Jimmy Carter who'll screw up the US economy royally, and thereby that of the rest of the world.

The last time we had either it drove interest rates to 20%, inflation to about 18%, unemployment to 12% and economic growth to negative numbers in the late '70's. It was known here as "stag-flation" and it was a royal pain in the A$$.

Guess what happened to people who had adjustable mortgages in that environment?

Dr. Mordrid

[KvHagedorn]

If you get a variable mortgage during this period of low rates, you are a fool. Grab the fixed and thank your lucky stars.

[Greebe]

http://www.huppi.com/kangaroo/L-carterreagan.htm

Please blame the appropriate party instead of taking pock shots at the Democrats contantly Doc

[GNEP]

I recently went variable but only having done the maths and ensured myself that it would still be affordable at up to 12.5% within the first 6 months and 15% after that. And also the dominant type of mortgage in the UK is floating or short-term fixed (up to 2 years). We don't have Freddie Mac or Fannie Mae here

I would suggest that you go with the 5yr fixed unless you can afford 10% rates in which case float and put the spare money aside.

[schmosef]

Originally posted by KvHagedorn
If you get a variable mortgage during this period of low rates, you are a fool. Grab the fixed and thank your lucky stars.

This is the type of advice you need to be wary of. No one solution works for everyone. Also, the situation in Canada regarding rate trends is different from the States.

(KVH, don't flame me, this is not a dig.)

[agallag]

Also, even when the rates went crazy in the 70s, variable still worked out to be a better deal. Yes, I've done the math.