Ok, so you’ve got a mortgage approval in place or you’re just going through the process of applying and you’re starting to think about interest rates, interest terms, repayment options, and so on.
While there is no right or wrong answer to what you should choose, there are some things you should consider before selecting any specific option.
Interest rates will move up and down over time as they have for decades. So from a home mortgage holder point of view, you have to basically consider two things: 1) Do I think interest rates are at or near a low point, and 2) what are my plans for retiring the mortgage in the future?
Starting with the first question, as interest rates reach record low levels, its reasonable to assume that this will not continue over time. Taking into account the current recessionary forces at work here at the end of 2009, one can make the argument that interest rates have been held artificially low to stimulate the economy and when the economy starts to turn around, interest rates are likely to rise. So, as a mortgage holder or potential mortgage holder, you have to decide if its now the right time to select a long term interest rate that will benefit you over many years or if you should select a variable rate to stay open to the potential that interest rates will drop further.
At the end of 2009, long term interest rates are at or near record lows and as a result, many people are locking in their rate well into the future.
To answer the second question, are you looking at paying off your mortgage over the longest potential time possible or do you think you will be retiring it in the next couple of years? For long term payback plans, long term interest rates allow you to fix your payment for years to come. If you think you may be selling your home in the near term, or you are confident you’ll generate additional cash flow in the next 6 months to 2 years, then a variable rate mortgage that’s always open to repayment should be considered.
At the same time, one of the best things about the mortgage market has been the development of mortgage products that allow you to have your cake and eat it too. With many mortgage programs available today, you can select a closed mortgage with a long term fixed rate of interest and still repay up to 20% of the mortgage each year without penalty.
Back to the variable interest rate discussion, remember that with a variable rate, your effective interest rate will be adjusted every time there is a movement in market rates up or down. To protect yourself against large movements while still taking advantage of a variable rate, you can select a capped rate variable mortgage whereby the lender will establish an amount your variable rate is allowed to move. You can also get a variable mortgage rate that includes a conversion feature to a fixed rate mortgage of at least three years (typically) without any penalty.
As you can see, there are numerous features to consider when finalizing the interest options on your mortgage. The ability to customize your mortgage to truly fit your current circumstances and future plans is totally attainable with the right advice and guidance from a mortgage professional.
If you have any questions, I always recommend that you give me a call so that we can go over them together and help you make a decision you’re going to be comfortable with.
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I'm a Toronto Mortgage Broker that arranges mortgage solutions on residential and commercial real estate property. With over 30 years of mortgage financing experience, I'm able to quickly assess your financing requirements and provide relevant solutions for your immediate consideration. Joe Walsh Google+ YouTube Channel