Friday, April 11, 2014

5 year closed mortgage or 5 year open, what's best?

Question and answer from an avid blog reader of mine.
Hi Mark,
I have been researching real estate and mortgages. Found your site and its is very informative.
In your professional opinion is 5 yr. closed mortgage better over 5 yr closed variable ?
It seems that banks are pushing for closed variable, why is that. I was offered a 2.7% 5 yr closed variables, after I requested a closed at 3.49%.
After some persuading I took closed variables, did I make mistake? My renewal is in June.
Your input an help will be appreciated
Best regards,
Hi S.,
Thanks for your kind comments, glad you have found it helpful.
There is no simple or quick answer to your question.  It's completely up to your personal risk tolerance.  If you took closed variable at 2.7 this rate will likely stay about where it is for many months and possibly a year or more.  What bank are you with?
If you chose the 5 year variable rate, doesn't that mean you are locked in with lender and your rate will fluctuate based upon the prime rate?  If this is the case and prime stays at 3% for at least another year or possibly longer, your rate will remain fixed at 2.7%  You are .3% less than prime, so this is a reasonable discount.  When you say renewal in June, do you mean that's when you can lock in at a fixed mortgage rate?  2.7% is a reasonable rate for a 5 year variable.
Mortgage rates are very competitive these days and the banks are slashing rates to get your business. 
BMO announced today that the 5yr fixed rates just dropped to 2.99%
I too agonized over a renewal for our mortgage last month and was pushing for an additional .1% off the rate.  After TD agreed to the final discount, I did the calculation and it made a difference of less than $2 per month on our payments, so it was minimal.  Depending upon the size of your mortgage, small discounts in the rate have little effect on your payment.
The most important aspect of mortgage payments, in my opinion, is to make sure your payments are accelerated bi-weekly.  This is most critical and will allow you to pay off a 25year mortgage in less than 18 years, you save huge on interest and can start saving for retirement 7+ years sooner than you otherwise would have been able to.
I hope this helps.
Please let me know if you have more questions.
Thank you,

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