Rates are cheap right now, there is no question about that. One should definitely be taking advantage of these low rates, as they will not be here forever. The 10 year average for a posted 5 year fixed term is 6.54% with the highest being in November of 2000 at 8.25%. The lowest rate was earlier this month at 5.19% (this was actually the lowest it EVER was). The current 5 year posted rate is 5.44%.
Those are the posted rates, for the most part you can get your mortgage rate at least 1.50% below the posted rate with a Mortgage Professional, like myself. Currently the discounted rate is a little lower at 3.79%. But for this blog we are going to keep it simple and use the current and historic posted rates for the examples.
If you sign into a mortgage today for $250,000 at todays posted rate of 5.44% your monthly principal and interest mortgage payment would be $1,333. The nice thing about a 5 year term is you know what your mortgage payment is for the next 5 years. You don’t have to worry about any changes, unless you change it.
Like i mentioned earlier, the lowest the rate had ever been was earlier this month so it is fair to say the rates will be going up. This is the tricky part, How much will it go up? The economists forecasts have been changing over the last year on how much things will change and how fast. But they all do say that they will not be going any lower.
So lets look at a couple of scenarios for our mortgage renewal in 5 years. For our first scenario we are going to say that the rates have increased to the average of the 10 years (6.54%). That is not a big stretch as this would only be an increase of 1.10%. This little increase of 1.10% would change the monthly mortgage payment from $1333 to $1500. That is a difference of $167 per month.
at $167 per month that is not a big difference. This is where your original mortgage application is very important. If your debt ratios were tight when you first applied for your mortgage, this $167 a month could be huge. Some people currently are just getting by on their income they have, so any increase is a big increase.
For our second scenario we are going to increase the mortgage to the highest the rates have been in the last 10 years (8.25%). This rate is probably a little higher that the rates will be in 5 years, but you never know. 3 years ago in January of 2008 the 5 year rate was at 7.55%. IF the rates were to increase to 8.25%, that would make the new payment $1,775 per month. This in now an increase of $442 per month. That is now a big number.
Of course there is somethings that should help with any rate increases. You wage will hopefully increase in the next 5 years. If you do a rapid biweekly payment your mortgage will be paid down a little more. Things like these could help take some of the burden off the new rates.
When you’re applying for your mortgage you don’t need to go to your maximum purchase price that your income or debt ratios will allow. Think of the future when you are taking advantage of todays low rates.
Of course this is all about the ‘What IF’. In 5 years time the rates could be right back down to where they are now, you never know. If you bought 5 years ago in October of 2005, your posted interest rate would have then been 5.80%. When your mortgage matured just this past October, the 5 year posted rate was 5.29% so the rate went down, and you would be saving money.
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Don’t just get a mortgage, Know your mortgage.
Thanks for reading
Scott Bourke, AMP
Regional Mortgage Corporation