Fixed Rate Mortgage
A large majority of people choose the fixed rate mortgage. This mortgage guarantees a certain interest rate for a period of time. The most popular fixed mortgages are 3,4 and 5 years. However, you can have a fixed mortgage for as short as 6 months or as long as 10 years.
The biggest selling feature of fixed mortgages is the 'guarantee' of the payment that you will be paying. However, if you pick a long-term fixed mortgage - say 5 years - you'll pay a lot for the privilege of having your interest rate locked in. In general, unless interest rates are steadily climbing you'll pay more in interest costs over the life of your mortgage if you choose long term fixed each time.
Why? You'll actually pay a much higher interest rate over a longer period unless interest rates go up fairly significantly.
In my own case, I stayed with terms of 6 months on my fixed mortgage and found that I was averaging from to 1 full percentage less in interest rates than those who had locked in at a five-year rate over the same time period. However, there are some caveats:
- This strategy works best when interest rates are staying fairly stable (within 1 percentage point or so) or are falling.
- You should have a mortgage lender who will allow you to lock in to a longer-term mortgage if rates go up and without a penalty.
If you have these two features through your lender go ahead and get a short-term fixed mortgage. The only downside is signing papers for your next term on a more frequent basis.
When looking at fixed rate mortgages don't be fooled by fancy promotions like cash back and other things. These incentives are usually restricted to 5 year and longer fixed rate mortgages. The lender can afford to give them because you are going to be their customer for a long time. Further, they don't reduce your interest rate which is the one thing that will really benefit you.
Your other best bet in an interest market where rates are staying the same or dropping is usually some form of 'variable' or 'adjustable' mortgage. These mortgages will allow you to get a better rate now in general (while the amount of your mortgage is higher) and will allow you to take advantage of fluctuating rates (which are hopefully moving in your favour). Again, you must have the option to lock in if rates go up. This will allow you to manage your risk. Simply keep a sharp eye on interest rates. Pay attention to what the analysts are saying about the short and longer-term future of rates. Then lock into a fixed rate mortgage from your variable or adjustable one.
This gives you the best of all possible worlds, including the lowest interest rate now and options later. But you have to make sure that you HAVE this option. Read the fine print. And be sure to ask your lender if it is possible before you sign the fixed rate mortgage papers.