With all the news about interest rates rising do you go long or short with your rate when you set up your mortgage?
After discussing your current life situation and answering some key questions with your mortgage broker you can make some decisions and set your mortgage rate and term to best fit your needs. There are many interest rate terms to choose from (1,2,3,4.5.7,10 year fixed and 3 and 5 year variable). If you are looking to lock in to a short or long term fixed rate, consider this:
A long-term mortgage makes sense if:
- If rates were on the rise and you could not take the hit. A long term rate gives you peace of mind.
- You don’t have a nest egg of savings or investments to fall back on
- You have little equity or net worth
- Your income could change based on a growing family or retirement for example
A short-term mortgage may be the way to go if:
- You expect to pay off large chunks of your mortgage or sell your home within the next three years
- You have a short remaining amortization (e.g. 5-6 years or less)
- Your credit is impaired and you need alternative lending till you repair your credit so you can qualify at a better rate in 1 year.
- You need to refinance in coming years to access your equity for education, investment purposes, etc
- You believe rates won’t rise soon and you have a short-term rate where you can make higher-than-required payments to maximize the reduction of your mortgage
With 2 year rates in the low 2%, 5 year fixed rates under 3% and 10 year terms under 4% there is enough of a spread that some borrowers can decide easily to go long or short with your rate. If you want flexibility go short. If you have little equity and want to play it safe maybe the long term rate for 5,7 or 10 years is for you. As rates shift upwards and the spread between the 5 and 10 year shortens you have to consider if a difference of .5% in a rate may be so insignificant that locking in to a long term rate may make sense for some, while others will take the risk and continue to play the short game. We have seen the spread between the short and long term rates become slim which creates the opportunity for discussion. These are decisions you can only make once you run the numbers with your mortgage broker.
Maybe it is time to add a call to your mortgage broker to review your mortgage plan to your new years resolution list.