Mortgage Term Nugget:
Variable Rate Mortgage: This term refers to Mortgages that follow the Bank of Canada Prime Rate which is set by the Bank of Canada. Your rate charged will go up or down with the Prime Rate.
Fixed Rate Mortgage: This term refers to Mortgages that give you a guaranty of your rate for the entire term. Your payments will not change throughout your chosen term.
Variable Rate Mortgages Versus Fixed Rate Mortgages: What should you do if you are in a variable today or contemplating taking a Variable Mortgage on your home purchase? First of all, think about your ability to take on the stress of inevitable future rate increases. The experts are telling us that rates will go up, it is just a matter of how much and when.
If you are contemplating a Variable rate Mortgage or now have one, then you need to have a simple stress free plan for the option of staying the course and having an exit strategy or get out now before the going gets stressful. My recommendation is for you to realize that at some point you will be paying more money. If you are able to withstand that then this strategy is for you. First you need to keep one eye on the variable rate, and the other on the fixed rates. The variable rate is important, because that is what your payments are based on. The Fixed rates are even more important to you. The fixed rates are your parachute or trap door. You want to give yourself a target point where the Fixed rates will eventually get to, that we can call your breaking point. Pick a rate, say 5.25%. Get to know the payments at your breaking point and make sure you can afford them. Now stop stressing every time prime goes up. But do watch the fixed rates and if and when the fixed rate rises to your breaking point for our example 5.25% then you call your lender and tell them to lock you in at that rate. Now lick your wounds and carry on knowing that you gave the variable your best shot, and most importantly you were in control with minimal stress.
If the thought of increasing rates or higher payments stress you out, then fixed terms are for you. My parents in the house they bought for $12,500 had a 30 year 6% Mortgage in the late 50's and until very recently we thought we would never see the rates that low again. Go figure.
I am Allan Seltzer and I am proud to be a part of Radio Real Estate.
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