4.63% fixed 5 year or 3.55% variable

[Kenazo]

Both are 5 year closed mortgages. I'm learning towards the 3.55% variable. It's a gamble, but I think it'll pay off.

The mortgage is for $120k.

 

[Oyeve]

Stick with fixed. Variable is to variable.

 

[iamwiz82]

Whats the max. increase per year, if any? How often is it adjustable?

 

[DaveSimmons]

Rates will probably go up at least 1% within the 5 years, the gamble is when and how much.

I'd guess though that the lenders have calaculated the probabilities and the most likely outcome of the variable rate is to come near the same cost as the fixed. Someone in the industry (or Google) might verify this.

 

[kranky]

How long do you plan on living there?

 

[Kenazo]

Originally posted by: iamwiz82
Whats the max. increase per year, if any? How often is it adjustable?

In Canada the Bank of Canada reviews Prime every 7 weeks. There is no cap. So potentially it is possible for the interest rate to go through the roof, though highly unlikely.

I think the fact that the 5 year fixed is so close to the 5 year variable tells me that the industry isn't expecting prime to rise too much in the next 5 years. Thus, if they're willing to gamble maybe I should be too.

Originally posted by: kranky
How long do you plan on living there?

Possibly long term. Not sure really. I'm thinking for sure 10 years though. With this mortgage I'm allowed to pay off 20% of the principle in any year w/o penalty, so being a closed mortgage shouldn't be a big deal. The rates on open mortgages are too high, imho.

 

[Queasy]

Go with fixed. The fed keeps increasing rates which will keep bumping up your mortgage rate.

 

[Budmantom]

fixed

 

[Adica]

Always fixed. Especially with such a low rate.

 

[Phoenix86]

Originally posted by: Adica
Always fixed. Especially with such a low rate.

Not if he only wants to live there a couple of years...

 

[Kenazo]

I forgot to add that the variable has the option of being converted into fixed if I feel that it's no longer the best option to be variable.

 

[Phoenix86]

Originally posted by: Kenazo
I forgot to add that the variable has the option of being converted into fixed if I feel that it's no longer the best option to be variable.

What's the catch if you switch? Obviously this doesn't benefit the lender, so something's missing.

If this is not the case, and there is no cost to switch, of course take the ARM over fixed rate, it's lower. If it ever gets above the fixed rate, swap it. It's like McDs saying "do you want to pay $3 for this hamburger, or $2?" Duh, of course you want to pay $1 less. But again, that doesn't benefit the lender, so there's got to be a catch.

 

[Kenazo]

Originally posted by: Phoenix86

Originally posted by: Kenazo
I forgot to add that the variable has the option of being converted into fixed if I feel that it's no longer the best option to be variable.

What's the catch if you switch? Obviously this doesn't benefit the lender, so something's missing.

If this is not the case, and there is no cost to switch, of course take the ARM over fixed rate, it's lower. If it ever gets above the fixed rate, swap it. It's like McDs saying "do you want to pay $3 for this hamburger, or $2?" Duh, of course you want to pay $1 less. But again, that doesn't benefit the lender, so there's got to be a catch.

Well, when you switch to fixed you end up switching to whatever the fixed rate is at that time. So of course it'll be a higher rate than the variable rate at that time.

For instance if I do variable and in a year it goes up to 4.5%, the fixed at that time would be maybe 6%. So, if I switch to fixed I'd end up @ 6%.

 

[Phoenix86]

Originally posted by: Kenazo

Originally posted by: Phoenix86

Originally posted by: Kenazo
I forgot to add that the variable has the option of being converted into fixed if I feel that it's no longer the best option to be variable.

What's the catch if you switch? Obviously this doesn't benefit the lender, so something's missing.

If this is not the case, and there is no cost to switch, of course take the ARM over fixed rate, it's lower. If it ever gets above the fixed rate, swap it. It's like McDs saying "do you want to pay $3 for this hamburger, or $2?" Duh, of course you want to pay $1 less. But again, that doesn't benefit the lender, so there's got to be a catch.

Well, when you switch to fixed you end up switching to whatever the fixed rate is at that time. So of course it'll be a higher rate than the variable rate at that time.

For instance if I do variable and in a year it goes up to 4.5%, the fixed at that time would be maybe 6%. So, if I switch to fixed I'd end up @ 6%.

Gotcha... So how long do you plan on staying?

 

You can't go wrong with fixed at that low of a rate.

 

[FrustratedUser]

Originally posted by: Oyeve
Stick with fixed. Variable is to variable.

I'd take fixed too. You know what you are going to pay for the next 5, 15 or 30 years.
I bet you a $100 the rates are going up in 5 years.

 

[Kenazo]

Originally posted by: FrustratedUser

Originally posted by: Oyeve
Stick with fixed. Variable is to variable.

I'd take fixed too. You know what you are going to pay for the next 5, 15 or 30 years.
I bet you a $100 the rates are going up in 5 years.

And I'm sure they'll be going up too. But, if I can have even a year or two when my principal is the highest, at 1% lower, I'd still be better off. But I'm still pretty undecided on which way to go.

 

[StageLeft]

I'd do fixed on that.

 

[halik]

Originally posted by: DaveSimmons
Rates will probably go up at least 1% within the 5 years, the gamble is when and how much.

I'd guess though that the lenders have calaculated the probabilities and the most likely outcome of the variable rate is to come near the same cost as the fixed. Someone in the industry (or Google) might verify this.

The fed has been rising the rates to combant inflation from all the deficits.I would go with fixed, as our budged deficit isn't gonna go away anytime soon...

 

[Kenazo]

I ended up doing the 3.55%, w/ weekly payments. Interestingly by doing weekly payments instead of monthly you save about $50/mth on a $120k mortgage @ 3.55%

 

[StageLeft]

Originally posted by: Kenazo
I ended up doing the 3.55%, w/ weekly payments. Interestingly by doing weekly payments instead of monthly you save about $50/mth on a $120k mortgage @ 3.55%

You can do the same by making a monthly payment and just paying an extra 10% or so.

12 X $1000 = $12k/year
52 X $250 = $13k/year

12 X $1100 = $13.2k/year

 

[sandorski]

What the US Fed is doing doesn't exactly matter to Kenazo's situation, as he is in Canada. The Canadian Central Bank has not been increasing Interest Rates lately, but they are a lot of indications that they will at some time in the near future.

That said, as was mentioned previously by someone else these Rates are very low already and it is quite doubtful they'll be going down anytime soon. I would have went Fixed and would for sure convert to Fixed the first time the Rate gets adjusted. If it goes Higher your Rate would still be good(assuming something Economically tragic doesn't happen), if it goes Lower you save yourself some bucks. At anyrate, hoping for Lower at this time is Greedy and not a Good decision IMO.

 

[Vic]

Originally posted by: Kenazo

Originally posted by: iamwiz82
Whats the max. increase per year, if any? How often is it adjustable?

In Canada the Bank of Canada reviews Prime every 7 weeks. There is no cap. So potentially it is possible for the interest rate to go through the roof, though highly unlikely.

I think the fact that the 5 year fixed is so close to the 5 year variable tells me that the industry isn't expecting prime to rise too much in the next 5 years. Thus, if they're willing to gamble maybe I should be too.

Originally posted by: kranky
How long do you plan on living there?

Possibly long term. Not sure really. I'm thinking for sure 10 years though. With this mortgage I'm allowed to pay off 20% of the principle in any year w/o penalty, so being a closed mortgage shouldn't be a big deal. The rates on open mortgages are too high, imho.

Canadian mortgages are so awesome. In the US, what you're talking about would be considered predatory lending, and is actually illegal.

For the Americans, a closed mortgage is one that cannot be prepaid or refinanced before maturity (i.e. the 5 years). There are generally exceptions to the terms, but usually the borrower is not even allowed to sell the house within the closed term period. So basically he's talking about a 30 year amortized 5 year note that cannot be paid off before 5 years but must be paid off at the end of 5 years. In the US, we would think of that as a 30 year loan with a huge 5 year prepayment penalty and and a huge 5 year balloon. OMG people would have a cow! Yet this is a typical mortgage up there.

In addition, he's talking about a truly variable rate loan. Not the adjustable rate loan we Americans are used to. None of the floor, ceiling, and adjustment caps as required on mortgages in the US. If the index blows up, so does his rate.

Personally, at 4.63%, I would happily go fixed. Your thinking was a bit flawed on why the rates are so close. There is a lot of volatility on the short-term side of the market.

 

[cavemanmoron]

Originally posted by: Queasy
Go with fixed. The fed keeps increasing rates which will keep bumping up your mortgage rate.

 

[Kenazo]

Originally posted by: Skoorb

Originally posted by: Kenazo
I ended up doing the 3.55%, w/ weekly payments. Interestingly by doing weekly payments instead of monthly you save about $50/mth on a $120k mortgage @ 3.55%

You can do the same by making a monthly payment and just paying an extra 10% or so.

12 X $1000 = $12k/year
52 X $250 = $13k/year

12 X $1100 = $13.2k/year

No, that's the wrong formula. What's happening is that since we'll be paying every week we end up not paying a full month's interest on 3 of the 4 weekly paments. It's because of a decrease in interest expense that we'll be paying $50 less per month on our mortgage, not b/c we're making less or more payments.

Of course we'd be foolish to not take that $50/mth we're saving and not putting it towards principal, but it's good to have the option of the extra cash flow, if we need it.






Oh, and our 3.55 variable is actually Bank of Canada prime less 0.7%, so unless BoC prime goes up to 5.33%, I'm satill at a lower interest rate this way than fixed. Even if it stays down for 2 of my 5 year term, and then creeps above 6%, I'm still better off variable.