what kind of mortgage to get??

[schmosef]

Originally posted by GNEP
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.

Even the people who predict that Canadian rates will go up don't predict them to go up that high and that fast.

In the end, it's all a game with the banks. They prey on your fear by offering so many choices. You have to make the decision based on your own situation and tolerance.

[Umfriend]

I would not know. What happens if you move? Can you take the loan with you in case the then current rates are higher? Any fiscal consequences? What are options to (partially) prepay? Do you have other investements? Do you still have some savings/short term deposits? How much of the loan amount in %-age?

In my current thinking, if you can afford the longest-term rate (25 or 30 year), you should either choose that or the shortest rate. Anything in between is suboptimal in my book. But that is on the DUtch mortgage environment, Canadian may be different,

[KvHagedorn]

Originally posted by 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.

What math is that? If you sit there and average them, perhaps, but if you can grab a fixed rate at the low point in the curve you are ahead of the game. Now, if the term is extremely short.. say 5 years, you might make out alright with the variable, but it's still a question mark. You don't want to have to worry about your house payment going up, so give yourself at least this peace of mind.

[cjolley]

A nice practical compromise would be a fixed rate 15 year.

Rates are low now and you would lock that in.
Pay out is faster than a 30 year.
Payments not much more than a 30 year.
Payments quite a bit lower than a 5-10 year.

There is no need to try to get exactly the correct answer.
You do not have enough information to hit the bulls eye except by accident anyway.
And you never will.

Chuck

[Tjalfe]

we will amortize the loan over 25 years, though we will make more than minimum payments to pay it off sooner.

The shorter the term, the lower the interest.. current one year variable is 3.25%, but it will be at prime -0.75%, so once prime increases, so do my payments. Good thing is that I pay more towards the principal early on, so even with higher interest later, I will pay this higher interest on a lower loan amount...hmmm

The fixed mortgage is only available ( from what I have seen so far) over periods of max 5-10 years, at which point I have to re finance it at whatever the rate is then... if it is high at that point, I will have lost out on the low rate leading up to that and I am punished with the high rates anyways. With a fixed rate mortgage, I am locking myself in for 5 years at the given rate, which will result in higher interest than the variable one for now, but at least I don't have to worry about it for 5 years.

There are pros and cons for both..

how fast does the prime interest rate normally move?.. seems 0.25% per time, and it is not doing it more than once or twice per year now.. is that normal?.. can we run into a situation where prime rises several percent in a year?.. is that what happened in the 70's/80's ?

[cjolley]

Just make sure the terms of the variable loan cap the yearly increase that is allowed.
I think it's usualy 2% or therabouts.
Chuck

[Helevitia]

In my personal experience, you only want to get a variable if one of the following conditions apply:

1. You can't afford anything else.
2. You know for a fact that you will be selling on or before the initial fixed rate is up(on the variable interest loan).
3. It is an investment property and you need the cashflow up front.

Otherwise, you should always get the longest fixed rate loan possible.

Dave

[Dr Mordrid]

Originally posted by Greebe
http://www.huppi.com/kangaroo/L-carterreagan.htm

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

Reagan didn't get into office until 1981, which leaves Carter responsible for the first 2 years of the double-digit crap. Even once he he came into office it took months to get bills written for congress etc.

Once passed Reagans tax cut didn't go into law until the 1981 tax returns were due in April of 1982, which is when the recovery started.

Also: those nubmbers were averages for the nation. Here in the rust belt they were at least double that, which is why Carter didn't dare show his face in those states.

Pfffttt....

Dr. Mordrid

[mmp121]

Having just moved into my first house in April '04, I can say that what Dave said is exactly the conclusion that I came to. I got a 7/1 ARM for 4.75% and we are definately planning on moving out to a new place in 5 years. Ours was a toss-up between the 5/1 ARM or the 7/1 ARM. We decided that a few years cushion was well worth the .375% more .

[agallag]

Originally posted by KvHagedorn
What math is that? If you sit there and average them, perhaps, but if you can grab a fixed rate at the low point in the curve you are ahead of the game. Now, if the term is extremely short.. say 5 years, you might make out alright with the variable, but it's still a question mark. You don't want to have to worry about your house payment going up, so give yourself at least this peace of mind.

You know, math with the numbers and the pluses and minuses. You should've learned it in school

Seriously though, there has been no time in the last 50 years where the interest rates have gone up fast enough for a fixed rate to actually save you money. Since variable rates start out a couple of percentage points below the 5 year rates, the variable rate would have to go up twice that much in the 5 year period before you would lose money.

For example, taking the current rates from INGDirect.ca, variable is 3.4%, and 5 years is 5.1%. That's a difference of 1.7%. Therefore, assuming a steady increase, the variable rate would have to go up to 6.8% in five years before you actually lose money. (Thats actually over simplified a little, since your principle is highest at the beginning, the lower variable rate at the beginning would help even more, allowing a few more tenths breathing room).

If you look at historical rates through the 70s, and do the math, you'll find that variable has ALWAYS been a better deal. You do have to account for the possibility that your payment will change a little, like you mentioned, but that's something you know going in, so you can prepare for that.

Of course, there's also the chance that interest rates will go up to 15% in the next six months. It's not likely, but it certainly could happen. That's the chance you take with variable rate mortgages. If you're not the gambling type, then maybe a fixed rate is better for you.

[gt40]

You should be able to get a variable with a cap - ask your bank, they don't always give you this option, but it is available. You will have a rate slightly higher than a variable, but it will be capped at a rate similar to a fixed mortgage.

[rylan]

Yeah go for a 10/1 adjustable rate mortgage. You'll lock in a good rate for 10 years then can see what things look like when the variable kicks in. Or consider a 7/1 also since those are lower fixed.

[UtwigMU]

Like others have pointed out, rates are extremely low.

The reason for this is that fed is trying to bump US economy by means of low interest, thus generating cheap capital for investments and also loans for spending (Keynessian paradigm).

Thus, the people are getting extra mortgages on their houses which have gone up in value (due to more cheap money -> more demand -> higher prices) and spending it on consumer products.

You're in Canada, but I'd guess your economy is much tied to US economy and real estate markets overlap to an extent.

Inevitably at some point inflation will go up, which will force increase of interest thus increasing loan payments and pressure on consumers. Some are even speculating about real estate ballon and it blowing up. Although the fed is expected to keep interest low for foreseable future in order to let people repay their loans as another 30's crisis is to be avoided at all cost.

So trends are:
- interest will increase
- real estate prices will go down (they have been increasing steadilly in the anglosaxon economies for the past decades - currently UK has seen slight real estate price reduction, some see it as indication of trends elsewhere)

[KvHagedorn]

Andrew, you know what I was saying.. you can massage statistics any way you want to. This same logic has been applied to the stock market as being the best place for your money over the long term, though the people really doing well did their buying when things were low and held on. Your elaboration was helpful in making your point, though. My point is that since interest rates are at such a low point right now, I would want to lock in that low rate if I were buying a home over a 30 year period.

I think the big point is the time frame here. 5 years? 5 years is the sort of time frame you buy your car in, unless you are rich. If the variable rate is for this short period, it might be alright, since so much of the principal is being paid off so quickly. With a 15 or 20 or 30 year mortgage, there is no telling what might happen. Every decision on what sort of longer-term mortgage to get should be calculated using a worst case scenario. Your home is the last thing you want to be putting on the betting line. People with variable rate mortgages HAVE wound up losing their homes as a result of rising rates.

[Tjalfe]

if I could lock in at ~5% for the full 25 years of the mortgage, then surely I would. the problem is that the longer I want to lock the rate for, the higher the rate.. as in locking for 10 years it is listed at 7% at most banks, locking for more would no doubt be close to 10%
since with the fixed rate at 4.85%, I am only locked in for 5 our of the 25 years, I will be screwed anyways if the rates go up at that time.
I am thinking that the variable rate is better, especially if I can make arrangements so that I can lock in at any point, if the rates are starting to sky rocket...

I guess only time will tell if that is the right decision \