Nothing to do with mortgages, just reminds me of summer!
There are a number of reasons that lenders always lead their marketing with the best rate on their fixed rate mortgage:
1) We’re used to seeing those rates. Fixed rate mortgages have been around since mortgage lending started.
2) Even small rate changes are sensational – a point one percent (.1%) increase can drive the press into a frenzy, even though that change might mean you pay $21 more interest per month.
3) Lenders, like you and I, like the predictability of a fixed rate mortgage. It means that they can also borrow (from investors) your mortgage amount, at predictable rates.
4) They make more money on the fixed rate mortgage. Yes, that is correct.
Some of the reasons that I will always recommend the more flexible variable rate mortgage:
a) The interest you pay over the course of a variable rate mortgage is substantially less than the interest paid for a fixed rate mortgage, historically. As I write this, the difference between the variable rate and the best fixed rate is .34% or $71 per month more interest in the case of a $250,000 mortgage.
b) If variable rates start climbing and you’re uncomfortable, you can switch to fixed rate for the remaining term. ( You can only switch once and only from variable to fixed ).
c) If something happens, it’s cheaper to exit or change the terms of a variable rate mortgage than it is a fixed rate mortgage.
‘Wait, what do you mean, if something happens?’
Well, imagine you or your spouse are offered a primo job in a town you can only fly to; or you want to refinance to cover the cost of renovations or your family grows and you need more space?
All these things mean that if, like the 60% of mortgage holders who do so, you need to vary the terms of your mortgage, you’re going to a pay a smaller penalty to pay out that variable rate mortgage than a fixed rate mortgage.
The pre payment penalties vary wildly between variable and fixed mortgages and on the fixed side, are calculated based on the lenders policies and procedures. The key for a variable rate mortgage is that the penalty is almost always three months interest. The difference, on a $350,000 mortgage, can be as much as $10,000. That amount of money can be meaningful when you are trying to pay for renovations or fund a move.
If you want to learn more about the differences between variable and fixed, book a call and we can chat further.
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