Mortgage options
Always a quandry what choice does one pick to renew their mortgage??
After lunch with some friends of mine discussing what to do with their mortgage I thought this article from mortgage broker Jessi Johnson was interesting. Here is what he says............
Are you interested in a variable payment but fear the risks? Do you love the security of the fixed rate mortgage but know that historically, the variable rate mortgage out performs the fixed rates? Some consider the 50/50 mortgage where you are part fixed and part variable however why take a mortgage that is historically better 50% of the time? I have a solution for you.
Let me introduce you to the frozen or set VRM (variable rate mortgage) payment. Essentially you have a VRM at 2.25% (current closed VRM rate) but your payments are frozen at a fixed rate. This fixed rate can be the same as the current variable but it is not suggested. We generally encourage you match the frozen variable payment to what you would be paying for a fixed rate. Today that rate is 3.39% so you are essentially paying 1.14% each payment directly towards your principle. Using an average mortgage of $330,000 with a 25 year amortization, this equates to the following:
Monthly payment at 3.39% = $1,628.49
Monthly payment at 2.25% = $1,437.52
Difference equals = $190.97That means that $190.97 is going towards your principle each month. This also means that you have 1.14% of space for Prime to move before you start paying more interest and less principle on the same payment. We never suggest locking your payment in at current VRM rate because it has no where to go but up.
What happened if my payment is frozen at 2.25% and the rates jump to 4% you ask? The higher the rate goes, the more interest and less principle on each payment you make. Eventually you will go into reverse amortization which is not a good thing.
So what happens with that additional $190.97 a month that goes to my principle? Well if the Prime doesn't fluctuate which is doubtful after a few years, your mortgage balance after 5 years will be $12,177.81 less!
