Choosing a Mortgage Term
One of the most important things to consider when buying a home, is choosing the right mortgage term. Specifically, needing to choose whether to go fixed or variable, and if fixed, for how long.
Sometimes you don`t have a choice with the term you take if your debt service ratios are at their maximum, and you have to take the lowest available rate to get your foot in the door.
When choosing a mortgage term, here are some factors to consider:
- If the rate environment seems to be downward, variable rate mortgages allow you to convert and "lock-in" any time without penalty. When locking in, the lenders` guidelines are usually such that they ask you to take a fixed term that fulfills the original 5 year. For example, if you took a 5 year variable, and were floating the rate for 1 year, then your minimum lock-in term would be 4 years.
- If you are considering a variable rate mortgage, should you go with a payment that stays the same, or go with one where the payment changes with prime rate changes?
- How risk averse are you? Will you lose sleep at night worrying about if/when interest rates change? If you are risk averse, then maybe taking a fixed rate term is the better option for you.
- How long do you think you will be in your home? If you are thinking of selling in 3 years, then maybe take a 3 year fixed, or consider a variable rate mortgage when you know the penalties to break the mortgage are a maximum of 3 months` of interest.
Your mortgage term choice is unique to you based on your personal needs & financial situation. There is no "one-size fits all."
It`s important to understand that predicting interest rates is impossible. You make your choice at the time you are buying, based on the information at hand. We try to provide the information you need, and answer all of your questions, to help you make the best choice possible for your unique circumstances.
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