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Strategies in Today's Environment More About Mortgage
Strategies in Today's Environment
First let's look at where mortgage rates are - most lenders now offer a one year-mortgage term at 6.50% and a five year mortgage term at 8.50%. These are their "posted" rates. There is, however, a big difference between the "posted rate" - the rate that you see on display and the "effective" rate - the rate that you will actually be charged. Depending on the strength of your relationship with your current lender, you can expect to be offered a discounted of between 25 - 75 basis points off the posted rate when you renew. The size of the discount can depend upon the size of your combined accounts with your lender.
Relative to the five-year mortgage rate, the one-year rate looks attractive - particularly when the discount is included in the equation. Biweekly mortgage payments on a $100,000 mortgage at a discounted rate of 6.00% on a one-year term would be $319.51. In comparison, biweekly payments at a five-year term of 8.00% (assuming a 1/2 basis point discount) would be $380.98. The difference between the two options is $61.47 every two weeks.
Based on strict comparison of the size of the biweekly payment, the one-year term appears desirable. However, right now the theory would be suggesting that borrowers consider locking onto longer terms - a three, five, or even seven year term mortgage. Why is this? Well, the mortgage yield curve, the absolute difference between short- and long-term mortgages, is large right now. The gap of 200 basis points is high by recent standards. The large gap is telling us something about financial markets: rather than continuing to fall, interest rates could be pushed higher, particularly at the long end.
Borrowers who continue to go short, waiting for the right opportunity to lock-into a longer mortgage rate could be in for some disappointment.
Article by Mary McDonough
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