Should You Lock Your Mortgage?

By: ispeculatornew
Date posted: 04.20.2016 (5:06 am) | Write a Comment  (0 Comments)

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Everyday, there is something to say about the economy. Since the 2008 market crunch everybody has their take on what is going to happen next. It has created a huge point of interest.

At the end of 2015, the FED raised their daily interest rate for the first time since the beginning of the crisis back in 2008. Even though, it was a small increase, it was enough to put several financial journalists and financial analysts in their seats to write some forecasts on their laptops (it’s funny to think that they don’t need to find a financial topic to write about… they are given by the 6pm news 😉 ). Now we are told that we should consider locking in our mortgage rates.

Interest rates don’t rise overnight

I don’t know if it’s because we are overloaded by information, or because the media business model is not very lucrative so they try to become more sensational, but I don’t see how interest rates could suddenly increase by 5%!

In fact, with global economy going sideways, resources prices going up and down each day, the FED eyes all macro-economic data and will proceed with caution. During the latest meeting in March, they decided to keep rates where they are until they see strong sign of economic growth. Therefore, we will more likely see another raise of the short term interest rate by the end of 2016, but don’t expect an important raise by any means.

So should you lock-in your mortgage rate?

We will all have someone around coming back with the stories of the high interest rate period of the 80’s and claim that we could see the prime rate at 7% in no time.

The thing is that you probably won’t pay your mortgage off over the next 5 years (if you will, then perhaps it’s a different game). And over the life of your mortgage (25 to 30 years), it has always been advantageous financially to keep a variable mortgage rate, (provided you can still sleep at night!)

You can probably lock in your fixed rate home loan rate for 5 years at 4.00% right now. However, if you stay with a variable rate, you are paying between 2.25 and 2.75%. So, worst case scenario: you are still paying 1.25% less than a 5 year fixed mortgage rate.

Therefore, if you are about to lock your mortgage rate at 4.00%, I have a prudent suggestion for you:

Calculate your payment at 4% and make this payment on your variable rate mortgage (that is currently much lower). You will then create a buffer and pay off your mortgage faster. You will protect yourself from a rate increase while benefiting from the lowest rate on the market.

Finally, the best move you can do is always the one that will make you sleep well at night. If you keep your variable rate and can’t stop worry about it, maybe you should consider to lock in your rate.

 

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