Mortgage Question

[naturallygorg]

I hope I'm in the right place to ask this question, we are finally getting a new house and I just want to ask, which one is better fixed rate mortgage or the adjustable ones? Our goal is not to get the lowest monthly payment (though it sounds promising) but of course we would want to minimize the amount of interest we pay over a period of time which means ultimately paying less. Any suggestions?

 

[joepistole]

I hope I'm in the right place to ask this question, we are finally getting a new house and I just want to ask, which one is better fixed rate mortgage or the adjustable ones? Our goal is not to get the lowest monthly payment (though it sounds promising) but of course we would want to minimize the amount of interest we pay over a period of time which means ultimately paying less. Any suggestions?

Well, the answer depends on many things. Interest rates on shorter term loans are less than longer term loans. A variable mortgage might make your current mortgage payments less today, but down the road that might not be the case. It's possible that down the road you may not be able to afford your mortgage payment or refinance your mortgage. And if for whatever reason your credit rating should worsen, it might make it difficult for you to refinance your mortgage should your mortgage payments increase.

Ideally, I think a 15 year fixed rate mortgage is probably the best. Your interest rates will be lower and you won't have to worry about increasing mortgage payments. But you will have a larger mortgage payment. You can significantly reduce the amount of interest you pay over the course of the mortgage by paying something on your mortgage every two weeks or every week instead of once a month.

 

[sculptor]

When interest rates are high variable rate makes sense (look for 3 year variable with max 1% change).
When interest rates are low(like now) fixed rate makes the most sense.
If you can save on your own, then a longer term means lower monthly payments...
Only take this course if you can save an equal amount as your mortgage payment.

I once had a fixed rate at 9% on my first house in Wisconsin. The legislature allowed the banks to void our contract and raise the rate----------I then had a higher rate on that property than the variable of my house in Chicago.

Nothing is certain. Remember that all is negotiable.

As soon as you have enough to pay off the mortgage, and live for another 6 months or a year, pay off the mortgage.

That is my rather conservative approach.

My brother in law mortgaged his house and took out a second to fund his business.
The business is worth well over $10 million now--- but still he struggles.........He is entertaining offers to sell. ....when the dust settles, he should have a comfortable retirement. But he paid in sleepless nights.

 

[Xelasnave.1947]

What ever you do make your goal to pay it off and free yourself of the burden.
It is so easy to borrow money you can overlook the fact it is a trap.
One can make money thru leverage admittedly but living loan free is the only way you will ever enjoy freedom.
Alex

 

[Bowser]

I hope I'm in the right place to ask this question, we are finally getting a new house and I just want to ask, which one is better fixed rate mortgage or the adjustable ones? Our goal is not to get the lowest monthly payment (though it sounds promising) but of course we would want to minimize the amount of interest we pay over a period of time which means ultimately paying less. Any suggestions?

I've seen people chasing the rates by refinancing over and over again. I've also know someone who did quite well with an adjustable, but that ws a short term investment. A fixed rate is a known percentage and easier to forecast payments over the years. An adjustable is more of a gamble over the long run. If I were shooting for the long term, I would try to lock in the lowest rate possible. What you also need to consider is the constant rise in property taxes. Sadly, they never seem to go down. Just assume your payments will rise over the years, regardless of which route you choose.

 

[joepistole]

I've seen people chasing the rates by refinancing over and over again. I've also know someone who did quite well with an adjustable, but that ws a short term investment. A fixed rate is a known percentage and easier to forecast payments over the years. An adjustable is more of a gamble over the long run. If I were shooting for the long term, I would try to lock in the lowest rate possible. What you also need to consider is the constant rise in property taxes. Sadly, they never seem to go down. Just assume your payments will rise over the years, regardless of which route you choose.

I've had my property taxes go up and down. It depends on where you live and how state and local government structure taxes.

 

[Seattle]

I can't imagine why you would want anything other than a fixed rate given the current rates which are very low by historical standards.

 

[joepistole]

I can't imagine why you would want anything other than a fixed rate given the current rates which are very low by historical standards.

And it is very likely interest rates will rise over the course of the next few years. If you are going to carry the mortgage for a number of years a fixed rate mortgage makes a lot of sense. The consensus belief is there will be three rate hikes his year.

 

[Bowser]

I've had my property taxes go up and down. It depends on where you live and how state and local government structure taxes.

It depends on the life of the tax initiatives, funding school construction, road construction, etc. People tend to vote for feel-good initiatives not realizing they will be paying for them down the road. Even renters make the mistake of not considering the cost, assuming their landlord will carry the burden. Also, there is no control over the county tax assessment on your property. It has been my experience that they tend to overvalue property beyond reasonable market value. Taxes are pretty much an unknown variable that, in my experience, only increases over time.

 

[Sarkus]

If you think rates are going to go up then fix as low as you can, but it's all ultimately a gamble. For example I have a reasonably good variable rate in UK of c.1.8% above base rate, but eventually the base rate will rise. But what to?
I could get a 5-yr fixed at c.3.5% at the moment, but rates would have to rise c.1.5% for that to be beneficial. If the base rate gradually went up to, say, 3% over the next 5 years then on my current deal i'd be paying 4.8% at the end of the 5 years, but over the course of the 5 years I'd have paid roughly the same as if going on the fixed now.
I was going to fix about 2 years ago when 5-yr fixed rates were slightly higher than they are now... and our base rate was actually cut since then, so not fixing back then should prove to have been a good choice.


So it just depends on where you think rates will go over the timeframe you're looking at, compared to the mortgage rates currently on offer.

If budgeting is your concern then fixing is better. If wanting to minimise overall payment then its a gamble, unless you have good insight into where rates will go and when.



Also, with mortgage rates as low as they are in the UK, paying off a mortgage early is not always the best way to maximise potential...
As said, my mortgage rate is c.2.1% at the moment, but a reasonable return from the stockmarket should easily exceed that (e.g. 5%, being conservative over the long term). So if I invest in the stockmarket rather than paying off the mortgage I'd be earning c.2.9% net on that amount.

If, however, your mortgage rates are higher than expected returns from investing then pay off the mortgage.

 

[naturallygorg]

Thank you for all your responses. This definitely gave us some important ideas regarding to something major as this is. Anyway, as what some of you said, mortgage really varies. The payment terms may sound so simple but certainly has a huge weight when the over all cost is computed. If we choose to pay our monthly dues with a smaller amount, the interest rate will definitely increase.

We have discussed our issues with a financial adviser and he clearly advised to make the terms shorter and go for a fixed term. That will of course depend on our current financial situation. We have checked mortgage rates in California and seems to be the best fit for us. We will still have to check our other option and see what is suitable for us.