Fixed vs Variable Rate?

            Let me start by saying hindsight is 20/20 and no one can predict the future!

            For the people who elected fixed or variable rate mortgages with some success in the past, they can easily gloat about their decision. However, at the time they were deciding, regardless of which route they took, they were taking a gamble on predictions of rate fluctuations at the time, or playing a gut feeling. This is because no one can accurately predict the future.

            The situation and circumstances are still the same today. Whatever your decision, only time will tell if you made the right choice. In talking with many clients, making the right choice isn’t always just about saving money. Because let’s face it, considering all things equal, if someone could absolutely guarantee us we would save money on going “fixed” rate or “variable” rate, we would probably go with the selection that saved us money. Our decision would be simple. But with no absolute guarantees, we need to weigh in all factors and circumstances that might impact us on our decision of “fixed” or “variable”.

            Since there are no guarantees, I thought I would give some sample questions that might help you decide which situation best suits your needs. (for the sake of discussion consider we are comparing a 5yr variable at 3% vs 5yr fixed at 4%)

Fixed vs Variable

• Will mortgage rates rise more than 1% in the next 5yrs? If so will that be soon, or further down the road (ie 3-5yrs?)
• If the rates started to rise, would you automatically want to lock in? Or would you wait? How high could the current fixed rate (4% as per example) go before it would make your mortgage payments uncomfortable? If you have little comfort room to work with, a fixed rate will keep your payments the same for the length of the term.
• Will you need a mortgage on a home for at least the next 5yrs? If not, variable rate prepayment penalties are often lower than 5yr fixed rates.
• Have you always been interested in following mortgage rates? Or are you only interested now that you need a mortgage? Were you aware of rates six months before needing a mortgage and would you still be watching rates six months or a year after you get your mortgage? If no and you elect variable how will you know if you should lock in?
• Would you consider yourself a gambler, or a conservative person?
•  If you bought a TV or appliance for $1,200 and at that time you shopped around and felt satisfied it was a reasonable price, but then, 6 months later that same TV or appliance was on sale for $1,000, - Would YOU... 1) be very upset, 2) only be a little disappointed, or   3) have moved on with other things and didn’t even notice the price had changed or even remember what price you paid when you bought it six months ago?
• Are the payments based on the variable rate, easy or difficult for you to manage now?

Well, hopefully one or a combination of answers to these questions will help you decide what’s best for you. If not give me a call and I’d be glad to discuss your situation. Thanks!

Michael J. Wilson