Editor’s Note: The following is a guest post by George. He’s a Baltimore Oriole’s fan who is trying to become a better writer. (I think he’s a pretty good one already.)
I’ve been scouring the market for a property. After years of going nowhere paying rent, I decided that my money could be put to better use paying down an investment than making somebody else rich.
I’m not sure why I paid rent for so many years – perhaps it was because we never felt sure about where we wanted to lay down roots. Regardless, it’s better to own the asset and enjoy the benefits of ownership than to have nothing to show for all your hard work.
This got me thinking: How do you find the perfect mortgage for your needs?
We’re living in difficult times. The Federal Reserve Bank – the Fed – is increasing interest rates, and this means the cost of credit is going up. This has a profound effect on long-term debt, especially if you do not to lock in a low rate with your mortgage broker, bank, or financial institution.
That’s the short-term perspective, but with increasing global uncertainty it’s never a sure bet which way interest rates will go over 10, 20 or 30 years.
Consider the people who locked in their mortgages at fixed rates 10, or 15 years ago, and then the Federal Funds Rate was eroded away to historic lows since the 2008 global financial crisis.
Nonetheless, this highly charged topic requires careful thought, planning and decision-making.
What are the benefits of a variable mortgage versus a fixed mortgage?
Let’s say you are considering purchasing a property worth $300,000, and you’re looking to put down 20% ($60,000) and take out a variable mortgage. That leaves you with $240,000 to pay back over the lifetime of your loan. A variable rate mortgage, often known as a floating rate mortgage, means that the interest rate on that home loan will fluctuate according to what the federal funds rate is doing.
More specifically, it moves in tandem with the prime interest rate. This is true in all countries that offer variable mortgages and/or fixed mortgages.
What will the Central Bank Do?
If you have an inkling as to how the Fed, the Bank of England, the Bank of Canada, or the European Central Bank is going to move with respect to interest rates, you may be inclined to lock in a fixed interest rate or a variable interest rate. In the US now, the trend appears to be moving in favor of increasing interest rates, making a fixed mortgage more attractive.
However, nothing is ironclad. Floating mortgages can go in any direction. People who opt for them are hoping that the interest rate that have locked in will be better than the interest rate by the time they are finished paying their mortgage.
Truth is: nobody knows which way interest rates are going to go over the long-term.
A fixed mortgage by contrast is fixed at the current rate. If you like certainty, and you’re not interested in the current state of the economy, a fixed mortgage is something that you can bank on not to change. People in many countries around the world prefer fixed-rate mortgages, since they provide that certainty that is so absent in the broader economy.
Of course, there are alternative options available to homeowners in the form of hybrid mortgages which allow a specific portion of the mortgage to be fixed, and a specific portion to be variable. Think of it as a compromise solution which gives you the best, or the worst, of both worlds.
Understand your options with mortgages
When you’re evaluating the pros and cons of variable and fixed/closed mortgages , it’s important to understand all options available to you based on your current financial situation. A closed mortgage and a mixed mortgage are also available. These refer to your ability to repay your mortgage prior to full duration of the mortgage term.
If you have excess funds available, or you will be coming into excess funds, you may wish to repay your mortgage ahead of time, to save on interest-related payments. Be advised that if you have a closed mortgage, you will have to make payments until the final payment is due on your term. Occasionally, banks and financial institutions will permit prepayments, but this is at the discretion of your mortgage provider.
By conducting the necessary research, you can avoid a lot of headaches, and possible financial ruin. Don’t get sucked into the wrong mortgage, because you may pay dearly for it over the long-term.