When most homeowners are looking at mortgages the very first thing they normally look at is the interest rate. While this is certainly a contender in the mortgage comparison game, it is not the only one. The best mortgage term length is vital too.
The term of your mortgage is the time agreed on until you and your lender review your contract. At the end of the term the variables such as the frequency of payments, the interest rate and the length of the new term come up for renegotiation again. When you choose your term it is locked in until the end of the agreed period or you break your mortgage contract. If you choose wisely you protect yourself from rising rates and if you choose poorly you pay more than you should.
Length of Terms
Lenders know that borrowers sway to the conservative side when they hear stories of interest rate hikes and they often have economic incentives to get you to lock into a longer term. Why wouldn’t they want that? Their interest payments remain secure so that they can count on that money to use elsewhere. The unfortunate result is that many people ignore shorter terms that could save them money. A longer term gives you some peace of mind, but you also pay a premium for it.
No one really knows what interest rates are going to do, though recent reports indicate rates they will remain low for the foreseeable future, but your mortgage term is the most important factor determining how much interest you will pay. Closed mortgages have no room for play and your rate is what it is until maturity. Most “no-frills” mortgages have lower rates, but you are also tied to the lender for the term or until you sell. It is really important to know what you are getting yourself into.
Long Term and Shot Term
There are two groups of mortgage terms: long-term and short-term. Long-term includes lengths such as four, five, seven, and sometimes ten-year terms. Short-term is one, two or three-year terms, including those with variable rates. While it’s easy to get sucked into rate frenzy, you are better off looking at your life and the level of risk that is right for you. Obviously, no two homeowners are the same so the decision hinges on your personal circumstances.
Long terms do make sense in some cases. When you have no play for an increase in payments, it makes sense to lock in as you know what your payments will be month in – month out. The same applies if you have less than a six month nest egg on hand for emergencies.
You would also want to lock in if you are anticipating a change in your income from layoffs, maternity leave, retirement or educational expenses. Locking in a rental property also makes sense if you want to know your exact expenses in the future. However, there are times when shorter terms will suit your needs instead.
Your Credit is a Factor
If you have so-so credit, you may want to consider a shorter term. After paying on your mortgage for a while, your borrowing power will rise and a better rate is a distinct possibility. Why stay locked into a higher rate than need be?
If you are going to sell your home soon or you want to pay down your mortgage in chunks, a shorter term is better. Chances are you can align these events with the end of the term and avoid penalties. Also consider a shorter term if you know that you are going to have to borrow on the equity in your home for life events such as education or entrepreneurial ventures.
Lastly, if you are in a financially stable place and you can afford an increase in payments if the rate goes rate, choose a shorter term if the rate is so amazingly low that you cannot resist it. Remember, many mortgage renewal rates can now be locked in for up to six months before the renewal date. This makes short-term mortgages very flexible. If you don’t like the rate you can find another, but if you do your rate is protected.
Finding The Best Term For You
Clearly, finding the proper term is important. If all of these choices seem overwhelming, let a professional help you. An accredited mortgage broker can find a product for your needs and the level of risk that is right for your life. Their services are free to you and they know mortgages, short or long-term.
Have a question about mortgage rates in Canada and choosing the best mortgage term length? Contact one of our mortgage professionals today for a free consultation and rate quote