Saturday, March 27, 2010

Mortgage basics - understanding fixed vs. variable rates

With all the mortgage options these days, you as the consumer have more flexibility than ever. But with choice can come confusion and the importance to fully understand the terms and definitions.

Someone last week told me they could get a 5 year mortgage for 2.75%. That's sort of true.

Right now, a five year fixed, using RBC and BMO as an example, you could lock in at 3.95%. It's a fixed rate and no matter what happens to interest rates, you're guaranteed the same rate for five years; thus the term "fixed".

Here's where it can be a bit confusing. You can have a five year "term" with a variable rate. Basically, if you chose this option, your interest rate would float with prime (right now 2.25% plus or minus the deal you get from your bank) and if interest rates increase or decrease, your rate also increases or decreases. The five years in this example pertains to not being able to leave that bank or change your options (some banks do allow you to lock in your variable rate - some options don't). However, your rate is not fixed in this example. Plus, there's "closed" or "open" terms. The latter means that you could fully pay off your mortgage, move it or change it without penalty - but you'll pay a higher term to do so.

So back to my friend's comment - yes, you could get a "five year mortgage" for under 3%, but remember, that rate would not be "fixed".

Make sure to read the fine print and understand what each term means before signing on the dotted line. Still confused? Check out your bank's website. All the big lenders have fantastic sites with explanations of their products, calculations, comparisons of options and more.

Check back shortly and I'll discuss the advantages and disadvantages of fixed vs. variable rate mortgages and how to choose which is right for you.

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