Mortgage Security not That Costly

Author: The House Team Of Mortgage Intellingence

Forget everything you thought you knew about the benefits of taking a variable-rate mortgage instead of locking in for the long term.


A new study suggests the security of a five-year mortgage costs little or nothing beyond a riskier variable-rate mortgage, providing you get a jumbo-sized rate discount.


"Interest costs on discounted closed five-year mortgages have been close to, and often lower than, those of variable-rate mortgages since late 1996," senior Canada Mortgage and Housing Corp. economist Ali Manouchehri writes in the study.
Homeowners have made variable-rate mortgages hugely popular in the past few years in the belief that you can save on interest costs by pegging your mortgage rate to your lender's prime lending rate. As the prime rises, or as has generally happened in the past few years, fallen, so goes your mortgage rate.



The prime rate at the major banks is now 4.5 per cent, while the posted five-year rate at the big banks is 6.15 per cent. In just one year, the variable-rate choice would save you about $1,700 on monthly payments toward a $150,000 mortgage amortized over 25 years (assuming a level prime rate).





Historically, you would also have saved a lot. The CMHC study shows that five-year mortgages taken out from 1993 through 1998 would have cost anywhere from $50,000 to $5,000 in additional interest paid over the term of the loan (the example is based on a $100,000 mortgage amortized over 25 years).


The flaw with this analysis is that it doesn't reflect real-world mortgage pricing. These days, very few people take out a mortgage without a sizable discount off the posted rates at major banks.



For that reason, the CMHC's Mr. Manouchehri decided to compare discounted five-year mortgages with discounted variable-rate mortgages. Incidentally, five years is the most popular term by far for fixed-rate mortgages at about 59 per cent of the total.


The size of the discounts Mr. Manouchehri applied was based on the difference between posted major bank rates and the best deals available from other lenders. For five-year mortgages, he used a discount of 1.25 of a percentage point; for variable-rate mortgages, it was 0.4 of a point off prime.

For five-year mortgages taken out between 1993 and mid-1996, the five-year mortgage was costlier in terms of interest costs. Since then, however, variable-rate mortgages have generally been a little bit more expensive.


Obviously, there's nothing in this study that decides the fixed-rate versus variable-rate debate once and for all.


In fact, the CMHC study may just confuse anyone who recalls some research done for Manulife Financial back in 2000 by York University finance professor Moshe Milevsky. His research found that the extra interest charged on a five-year mortgage would have cost $20,000 on average between 1950 and 2000 for a $100,000 mortgage amortized over 15 years.





To make some sense of the variable-rate versus five-year question, let's go back to the CMHC study.





It shows that five-year mortgages, discounted or otherwise, were especially bad choices for a three-year period starting in mid-1993. Rates were high for a while back then, but they subsequently fell.





You were a spectator to these rate declines if you were stuck in a five-year mortgage, while people in variable-rate mortgages would have benefited almost immediately.





It's a different world now, though. Five-year mortgage rates are close to a 50-year low, which suggests they're far more likely to rise over their term than fall.





So what's the best choice here, variable-rate or five-year fixed rate? People who want to pay rock-bottom mortgage rates for as long as possible will probably still want a variable-rate mortgage. Remember, you can lock this sort of mortgage into a fixed term without penalty in most cases.





The case for the five-year term looks almost as strong, though. First, the CMHC study tells us there may not be a significant cost to locking your mortgage in for five years, and you might even save a little over a variable-rate mortgage.





Second, the likelihood of higher rates in the years to come would suggest that this is a good time to lock in.





If you had a variable-rate mortgage discounted to 4 per cent, the prime would have to go up by 0.85 of a percentage point to equal the current five-year rate. That's not a lot of ground to cover in the span of 12 to 18 months when the economy is doing well.





Arguably, the variable-rate versus fixed-rate debate is all about risks and rewards. Right now, the five-year option offers much less risk, and almost as much reward.

Article Source: http://www.articlesbase.com/mortgage-articles/mortgage-security-not-that-costly-91034.html

About the Author:

The House Team is commited to providing quality information to help people make informed decisions about their mortgage financing needs.



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Home Mortgage Loan - Tips for Reviewing Loans

By: Alan Lim
Once your have begun the process of obtaining a home mortgage loan, here are some essential things to watch or watch out for in reviewing loan proposals and documents. When you are in the process of obtaining a home mortgage loan, there are undoubtedly many aspects of the process that are new to you. The language that applies to loans, for instance can be different from the meaning applied to the same term in everyday life. It is far better to review each clause of the prospective loan document as soon as you have access to it and make certain that you understand the terms that are used and how they apply to your own financial situation. Here are some concepts regarding your loan that will be important in ensuring your loan package is acceptable in the long run. Overall cost of the loanThere are many aspects that go into determining the loan cost on your home mortgage loan. The interest rate, mortgage type, loan fees, and term of the loan are just a few of these. You may understand the words, but it is important to take a look at what the words will cost you in dollars and cents. Even a few dollars less in the early stages of a loan can save you thousands of dollars over the entire loan period. It's important to take advantage of such savings. Mortgage typeThe basic mortgage types that are common when you apply for a home mortgage loan include the fixed rate mortgage, the adjustable rate mortgage, reverse or negative equity mortgages and interest only mortgages. Each of these has advantages and disadvantages and you are the best equipped to determine whether the type of mortgage will work for you. The important factor is that you review the documents and proposals so that you know precisely which type of loan you are getting. Being surprised in a few months by a two to five hundred dollar increase in your monthly payment due to an adjustable rate mortgage can result in the loss of your home. Interest rateWhen reviewing the loan documents for a home mortgage loan, one of the important factors that you should check and understand is that of interest rate on the loan. Mortgage interest rates can vary from low to high, depending upon such other factors as the type of loan, applicable usury laws, credit rating, term of the loan and others. Review the stated rate and make certain it is what was agreed upon. If you are expecting a fixed interest rate and the documents provide for an adjustment in 24 months, chances are good that the mortgage has been prepared with a variable interest rate.Broker's reputationActually, checking the broker's reputation should come well before preparing or reviewing the documents for your home mortgage loan. Sometimes though, you won't see a problem until you actually get the documents in writing before you. If there is anything that is unclear or incorrect, the time to get the problem corrected is before signing. A reputable broker should be willing to work with you to correct problems or clear up any communication issues.
Comprehensive information on everything related to Home Mortgage or Home Mortgage Loan can be located on the single website at http://www.homemortgageloan-refinance.com/First-Time-Home-Loan-Borrower-Tips.php .
Article Source: http://www.ArticleBiz.com