Mortgage Tools
Mortgage Terms - Getting it Right the First Time
Choosing a mortgage term is one of the important decisions you will have to make when purchasing a new home. There are many options out there, and picking the right term can save you money in cases where:
- Interest rates fluctuate
- You experience a change in your personal finances
- Your living plans or situation is altered
The best way to prepare yourself for this big decision is to be informed about the different term options available to you, and the benefits and disadvantages of each. The main choices you have are:
- One to five-year fixed terms
- Seven and 10-year fixed terms
- Short-range variable terms
One to Five-Year Fixed Term Mortgages
The most popular short-range fixed-term is the five-year fixed mortgage, particularly when interest rates are low and projected to increase. When this is the case, more people lock into those low interest rates. If rates do increase, sticking with that low rate will save you an abundance of cash.
With a four-year fixed term, you could save money if you decide to refinance your mortgage, which homeowners do every three to four years, on average. A four-year fixed term will let you lock into a low interest rate, and could save you from paying any penalties incurred from refinancing before the end of a five-year term.
Lengthier Fixed Terms: Seven and 10 Years
If you are looking at longer terms, your options are seven and 10 years. A 10-year is advisable because the rates will be similar for both, but a 10-year gives you three extra years with the same low interest rate. With 10-year terms, you can also get out after five years with only paying a minimal penalty. The only drawback of the 10-year term versus the five-year is that you will really only save money if interest rates spike and stay high for a significant length of time.
Five-year Variable Terms
The rates on variable mortgage terms are most often lower than those on fixed mortgage terms. This type of mortgage term provides you with three further options:
- Five-year closed variable
- Five-year open variable
- Five-year capped variable
With a closed variable, you commit to stay with that mortgage term and cannot terminate the agreement early. If you choose a five-year closed variable term when interest rates are low, you will save money over a fixed-term as long as rates do not increase too much.
Five-year open variable terms are much more flexible, and consequently have a higher interest rate. However, if the market rates increase dramatically, you can always choose to terminate before the rates get too high.
The five-year capped term offers the advantage of an interest rate that is guaranteed to never increase beyond a certain point. The problem is that you will pay a higher rate to begin with, and if the interest rates are low anyway, you will be paying more than you need to.
