Did you know that variable mortgage rates have historically been less expensive over time? Why is it then that fixed mortgages are more than three times more popular than their variable counterpart and more popular with younger buyers specifically? We often think of variable and fixed mortgage rates in opposition to each other when really, it depends on what’s best for you!
Do you have a variable-rate mortgage?
If you have a variable-rate mortgage right now, you’re in one of two situations. You either have a static payment or an adjustable rate. The former means your payment doesn’t change when the prime interest rate goes up and the latter means that your payment fluctuates with each increase or decrease in the prime rate. We’re currently in an increasing interest rate market (if you haven’t noticed!), so the key is knowing which type of variable mortgage you have and evaluating the impact.
If you’re a static payment holder, you probably don’t have to worry about your payment moving BUT you should understand that, at a certain point, it will no longer be covering some or any of the principle since it will be counting towards the increased interest. Know your discount and what the lenders refer to as a “trigger rate”, the interest rate at which the payment would need to increase, and be mindful of manually adjusting your payment.
If you have an adjustable-rate mortgage holder, which is most people with variable mortgages, a general rule of thumb is that for every 0.25% increase in the prime rate, your payment will increase about $12/$100K of your mortgage balance. You also need to know your discount (i.e. Prime – 0.5%) relative to the closest available fixed-rate mortgage you could lock into. Why? Even though your adjustable-rate mortgage is increasing, switching to fixed may force you into too high of a payment. Depending on the math, it may make sense to ride this out.
Do you have a fixed-rate mortgage?
If you have a fixed-rate mortgage and you know that rates are increasing, then you’re not concerned about your payment increasing… now. But what about the future? Now is the perfect time to consider increasing your payment slightly over the next weeks, months, or years to hedge against rising rates. Why?
- Doing so will force you to change your budget accordingly and help avoid payment shock at renewal time.
- Think of it as an overpayment that pays off additional principle on your mortgage (and less interest) in the long run.
- It actually buys you time because you can change your amortization at renewal and adjust the payment to fit your budget come that time.
The appeal of the fixed-rate mortgage is that you can set it and forget it which makes budgeting a lot easier due to the stability. Just remember, if there’s a big difference between the variable and fixed rates, the extra being paid for this stability may actually cost you more — so do the math!
So don’t sleep on it, contact the Kyle Miller Mortgage Agent team if you want to better understand the different mortgages out there and which is best for you!
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