The mortgage rates continue to stagnate, for the time being. A client asks which term he should choose on his renewal? Term is the period of time over which a mortgage is actually a contract. You can pick a term ranging from 6 months to ten years, or even longer. During that term, the payments will not change, and the rate is guaranteed. Normally, the longer the guarantee, the higher the rate. At time of writing this editorial, the rates went from 4.99% to 7.15%.

Our client is refinancing a property where the mortgage has matured (the end of a term). His present lender has offered a renewal (extension of the term) with a full range of rates and terms. Before I answer the question above, I asked him his intentions for the foreseeable future. He and his family will remain in this housing unit, to the best of their knowledge. My answer then, in this case, is to either take a five year term now (at 6.80%) or a 6 month "convertible" mortgage (at 4.99%). The difference between the two plans are as follows:

a) the five year term would guarantee the rate today for the next five years. Should the rates go up or down over the next five years, the rates (and payments) will not change for this client. Most lending institutions offer prepayment privileges within their mortgage, but as in most contracts, you cannot pay off the mortgage without a penalty;

b) the six month convertible means that for the next six months, the rate (and payment) would be fixed. As in the mortgage above, the client cannot pay off this mortgage without a penalty, however, during that six month period, the client could elect to change the mortgage to a new five year term at any time, without notice or penalty. The rate would be the five year rate in effect with this lender at the time of conversion. In other words, for the next six months, you become a rate watcher. When you feel the rates have bottomed out, you advise the lender to lock-in the payment to the then five year term rate.

If you should choose this product, take a payment that most closely mirrors the payment of a five year term product. In other words, even if the rate on the convertible product is 4.99%, take a payment geared to the eventual rate you will be getting when you convert. The reason you want a higher payment than 4.99% rate calls for is that when you convert, you don't want the new payments to be higher than the payments you are used to paying.

 

If your lender offers you a 7 or 10 year term at less than 7.50%, you may want to look at the long term stability of that product.

If you want to become a rate watcher, the convertible product is good. If you don't have the time, take the five year term or longer now, the rates haven't been this low in decades.