Thursday, July 16, 2009

Consider a one year tem instead of a variable rate? Here's why ...

This article courtesy of Canadian Mortgage Trends

If you want a variable-rate mortgage (and are suited to one), take a peek at a one-year instead.

A lender contact of mine recently sent me their nine good reasons why:

1) Although they’ve been improving, today’s variable-rate mortgages still have abnormally high interest rate premiums (lowest is currently prime plus 0.35%, vs prime minus 0.75% or more a year ago).

2) A 1-year mortgage doesn’t lock you into a rate for 3-5 years. That means you can renew/refinance in 12 months when (hopefully) discounts to prime might be back.

3) The rates are comparable. Variable and 1-year mortgages are both based on short-term interest rates, so they move together over time. A discounted 1 year rate for a mortgage closing within 45 days can be had today for 2.75% OAC while a variable rate can be obtained for (prime + .05 ... 2.25% + .35% =) 2.60% OAC.

4) In certain cases, rates on 1-year mortgages are better than today’s best variable rates (see above).

5) The most flexible 1-year mortgages are convertible into a fixed OR variable rate at any time, and at no cost.

6) A 1 year term gives your licensed mortgage broker an opportunity to negotiate with lenders on your behalf again in 12 months.

7) If rates go up in the next 12 months, you’re protected for the remainder of the term in a fixed-rate mortgage where there is no such protection with a variable rate.

8) If rates steadily climb over the course of five years, 1-year terms could help you come out further ahead. That’s because 1-year rates reset slower than variable rates—which is helpful when rates are rising.

9) 1-year payments are fixed for a longer period of time than variable payments. That helps you budget a little easier. (The exceptions are the minority of variable-rate products with fixed payments).

Besides a good 1-year fixed, consider a 2-year term as well (currently available OAC with closing within 45 days for 2.95%). The rates are not that far behind. For an extra 0.20%, you’ll get one additional year of rate protection.

Disclaimer: One-year terms are not suitable for everyone. The above reflects opinions and not a recommendation. Consult a licensed mortgage broker for details.

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