Switch to Variable or Stick with 5.00% fixed
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Dear Friends,
I need a bit of advice, I own a house with a mortgage balance of 294K, I am on 40 yr mortgage with 5.00 rate fixed for five years. I am paying 1831/- monthly to bring it down to 24 years. Since, the variable rate now is close to 3.81 I was wondering if this is a good to switch to Variable floating. Right now penalty of breaking the term is 4k and I have the option of adding the penalty to the mortgage.
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You can complain because roses have thorns or you can rejoice because thorns have roses.
There are a few things to consider before paying the penalty :
Have you thought of using of Home equity line of credit ? Using HELOC to pay down 15% of your outstanding mortgage is an option to consider as it is at prime rate which is 3% currently.
Also calculate how much interest savings will you get if you switch from 5% to 4.39% (fixed for 5 yrs).
My personal view is this is not a good time for variable rate as the difference between variable and fixed is not very much.
If you decide to break your mortgage consider paying down atleast 15% from your HELOC in order to bring down your penalty.
Quote:
Originally posted by kapilmalik
Dear Friends,
I need a bit of advice, I own a house with a mortgage balance of 294K, I am on 40 yr mortgage with 5.00 rate fixed for five years. I am paying 1831/- monthly to bring it down to 24 years. Since, the variable rate now is close to 3.81 I was wondering if this is a good to switch to Variable floating. Right now penalty of breaking the term is 4k and I have the option of adding the penalty to the mortgage.
You have not mentioned how much time is left in your present contract. In any case, if you take variable right now at 3.8%, you would recover the penalties in just over 14 months and you will save in interest afterwords. However, this would be true only if the variable does not rise over this level in 1 year time and no body can predict the rate movement. The variable rate seem to remain low in short time but may start rising by the year end and that would erase the savings. I believe, that if you get a 5 year rate at around 4% plus, then you would not only have peace of mind but are certain to save close to $2900 average every year and would be ahead of $10,000 in 5 years.
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Pramod Chopra
Senior Mortgage Consultant
Mortgage Alliance Company of Canada
Location: carl sagan's universe
Posted on: 22-02-09 16:05:44
Quote:
Originally posted by kapilmalik
Dear Friends,
I need a bit of advice, I own a house with a mortgage balance of 294K, I am on 40 yr mortgage with 5.00 rate fixed for five years. I am paying 1831/- monthly to bring it down to 24 years. Since, the variable rate now is close to 3.81 I was wondering if this is a good to switch to Variable floating. Right now penalty of breaking the term is 4k and I have the option of adding the penalty to the mortgage.
aarey Shah Rukh kya dance doing!
Anyway, seriously though, speak to your current lender and if they are also offering variable at 3.80% or fixed at 4.34, ask them if they will waiver the penalty. If not, then go to another lender and when your present lender finds out you are actually moving the mortgage, it will double back to you and will bargain with you on the penalty.
You can stand fast and say- full waiver or nothing and they just might waiver the penalty, esp since you say you are overpaying the loan.
BTW, the prime rate is slated to go down on March 3. No guarantees though. And if long term bonds go down further, the fixed term might even go down further. In the last month or so, the fixed 5 year rate has gone down twice.
Location: carl sagan's universe
Posted on: 22-02-09 16:11:50
Quote:
Originally posted by dalsania_nh
There are a few things to consider before paying the penalty :
Have you thought of using of Home equity line of credit ? Using HELOC to pay down 15% of your outstanding mortgage is an option to consider as it is at prime rate which is 3% currently.
Also calculate how much interest savings will you get if you switch from 5% to 4.39% (fixed for 5 yrs).
My personal view is this is not a good time for variable rate as the difference between variable and fixed is not very much.
If you decide to break your mortgage consider paying down atleast 15% from your HELOC in order to bring down your penalty.
didn't understand this. would you please kindly elaborate.
also who is giving HELOC at prime? If YOU are, let me know and I will send you a barrage of HELOCs.
kapilmalik - don't want to hijack your thread. But my situation is very similar to yours. I am quite encouraged by what investpro has posted.
investpro - why would the existing bank waive off the penalty or even negotiate?if why would they lose money? In absence of lending system like the US where you can refinance mortgages without any penalties, the new bank is unlikely to pay the penalty (or a part of it).
From my experience, the existing bank may allow to "blend and extend" the mortage using the new interest rate; which would give you a better rate but extend the mortgage term by a number of years. I guess you are the guru ... can you please elaborate and share some tricks to save money when switching a mortgage in Canada?
[my situation: 5.09 5 yr fixed with 3.5 years to go, 35% principal paid off; penalty = 7500 (based on i rate differential) ]
I have a HELOC with one of the five big banks at prime rate.
By paying down a part of your mortgage from your HELOC you will bring down your interest rate on this part without even paying a penny for penalty.
If you have HELOC at prime might as well consider doubling up your mortgage payments from HELOC in order to take advantage of the lower rates.
This also brings you in a situation where part of your mortgage is at fixed rate and other part is at variable (which in turn is much lower than the fixed rate). Not to mention with HELOC you have the flexibility to pay down any time you want without any penalties.
