Thursday, May 10, 2007

Mortgage

So I've been given 3 options in terms of mortgages, and I'm not sure which is optimal at this point, so take a look and perhaps let me know what your thoughts are.

Here's the deal, I'm getting a place that's a bit of a fixer upper, with the intention being to do the work and then sell. I figure it'll take 2-3 years to get it all done, after which it goes back on the market. Of the offers below, which is the best choice? Or, is there another consideration out there I haven't thought of?

1) 5 year fixed rate at 5.09%.

2) 5 year open variable at prime minus .75% for a rate of 5.25%. This mortgage would allow you to pay it off in full at any time with no penalties.

3) 5 year closed variable at prime minus .90% for a rate of 5.10%. This mortgage would allow you to lock in or convert out of the variable option at any time with no penalties or fees.

3 Comments:

Blogger James said...

Interesting...

For me, I prefer the stablilty of a fixed rate. I like the comfort of knowing that my mortgage payment will be the same this month and next. It also allows me to be lazy and not take any interest as to what the national interest rate is doing.

I would expect that with a variable rate mortgage, one would watch the bank of canada's website like a hawk, looking for fluctuations in the prime rate.

However, that all being said, seems like this will be a short term investment for you. And typically, advice given to new home-owners is that changing houses frequently (less than 4-5 yrs) is not economically sound because of fees and charges. So my point is this: if you can get a mortgage that allows you to get out / pay it off without any penalties than that's a good thing.

Looking at the rates you were given, the fixed rate of 5.09% is really good for right now. Most banks are advertising 5.24% 5 yr fixed rate - so that's a 0.15 difference, which is pretty good.

I suppose you need to ask yourself this question: what is an acceptable level of risk?

If you have a high tolerance of risk, take the 5.10% variable (with lock-in option) and pray for a lower interest rate over the next couple years; if it drops, you win. If it rises, you lock in right away (actually the day before, so start seeing psychics regularly) as to not get stuck with a higher rate.

If you have a low tolerance of risk - take the fixed rate at 5.09% - whatever happens to the the interest rate over the next 2-3 years doesn't matter since you have a decent, locked-in rate. If the rate does drop, then you are paying more, and the bank wins.

I guess there are wins and losses now matter which decision you make. You just have to think like this: at the end of your life, you have to hope that half the time you won, and the other half the bank won. Otherwise you will go crazy.

Does that make any sense?

4:23 PM  
Blogger Palmer said...

I echo James' sentiments and also want to point out that if you want to put money into the house, why not just go for peace of mind with the mortgage rate and rack your brain when it comes to actually saving money on your fixing-ups.

1:08 PM  
Blogger David said...

You are wise in the ways of the mortgage my friend. I'm actually going to look at places tomorrow - could one of them be "The One"?

Where's the Oracle when I need her?

I guess my decision is going to depend on the place. If it's a decent house in a good neighborhood, then many it's worth taking the fixed rate mortgage; if it ends up being a place that it merely a means of building equity, then the open variable or perhaps an open fixed might make more sense.

Thanks for your thoughts James!

12:46 AM  

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