My phone has been ringing more and more the past few months with this exact question… “Shaun, should I be looking into locking in my below prime variable with rates as low as they are today?” In my opinion this is a very difficult question to answer, the reason for this is that if a client is paying between .60 – .90% BELOW prime they are currently paying between 1.35% – 1.65%. These sort of huge discounts on variable rate products are not available in today’s market. Consider where fixed interest rates are today and they aren’t even close to this. For example if a client wanted to lock in today for a 4 year term they could get a 30 day quick close rate of 3.89% (this is good, if not great but over 2% higher then what some clients are paying on their variable rate.) Now, given the 3.89% rate a 200K mortgage over 25 years would be $1,040.15 per month. That same client should they stay in their existing below prime variable rate at prime – .60% is paying $813.51 per month that’s $226.64 in just the payment difference. The same client is paying $369.08 MORE in interest at 3.89% as well . Now don’t get me wrong, the reason this is a difficult question is that we ALL know that the variable rate (prime rate) is going to change and it’s very likely to happen by 2nd quarter 2010. When it does the big question is how drastically are the rates going to rise and how quickly, also when it does where are fixed rates going to be? Without the crystal ball, I wish I had.. It’s hard to say! So staying in a below prime variable may be very attractive today, given the rates, but when rates start to move and you want to lock in to a fixed rates, the rates we see today may not be available
If you find yourself in this situation please remember to consider your comfort level and tolerance for risk. Rates are going to move, but when they do you need to remember the huge difference you are currently paying on your payments and especially in interest.
One thing I’ve been telling clients to do, should they decide to stay in their variable rate product is to adjust their payments to the current fixed rate payments amount. For the example above, instead of the client keeping the cheaper payment, contact the lender and have them adjust their payment to the higher amount, ALL the extra money goes directly on to your principal balance and this will drastically reduce your interest cost and save you months if not years on your amortization. In addition, it will get you used to the higher payment so when your variable rate increases you are prepared and ready for the higher payment.
Should you need to check some payments for your specific mortgage please feel free to visit my Mortgage Calculators section on our MCC site