Consumers Beware!!!!!

The long term mortgage rates are at an all time low!  Most Clients who come to me for mortgage financing have done some shopping around.  My website shows the fixed rates at most lending institutions. My website does not show the "variable" rate products or the "adjustable" rate products, although they are all available through me.  Why would I not post these rates on my website?  I do not feel the products warrant the advertizing. Why would you want to gamble on short term products?   The lower rate , of course!

Mortgage lenders are offering discounted interest rates for short term mortgages, or visibly inexpensive variable rate products to get you in the door.  Isn't wonderful to know that you can get rates from 1.5% to 3.5% on various short term products, and the payments at those rates are "oh, so  low" but...........

Lending institutions owe it to their depositors and shareholders to get the highest yield on all their lending products, while paying the least amount possible for those deposits.  How can the lenders achieve their mandate when they offer such low rates?   It's called the "ol shell game!"

Suppose you were able to get $100,000 mortgage at 2.5%.  The monthly payments for this short term mortgage would be $448 per month.  The lending institution gets you in the door with their lowest rate, and are so volunteering to mention that you, the Consumer, may opt for a longer term at anytime (even discounted) with or without penalty, should fears of higher rates bother you.  Isn't that wonderful!  There is only one real problem for you, the Consumer........ the new payment may be considerably higher! Once you have gotten used to paying $448 per month, should you arrive at the end of the initial term, and/or wish to select a longer term for fear the rates may escalate, the new payment at the new rate (example 6%) would jump to $640/month, almost $200/month more.   That's almost 50% higher than what you were used to paying, still amortized over 25 years.  For the lender, short term funds are plentiful (Investors waiting for rates to go up), cost  f funds are cheap.  The lender can afford to wait.  For the unsuspecting Consumer, the jump to a longer term may be too expensive, especially if rates go up.  The Consumer is now forced to take short term rates forever, at the mercy of the marketplace.  I do not expect rates to skyrocket, but on the other hand, if you keep waiting for the long term rates to go down to the present discounted rates, it may not happen for a while.  The chances of rates going up far exceeds their potential to go lower.  Realizing that your short term product may up a little, and also realizing that the long term payments jumps as much as our example above, one may want to wait, and wait, and wait, until the short term rate now rivals the long term rate you could have had several renewals ago. 

For the firstime buyer, I would recommend at least a five year term mortgage to give you peace of mind, and budgeting prowess.  Once you have gotten used to the higher payment, two or three years from now, you may be able to afford more.  At that point in time you may choose to increase your payment to shorten the amortization, rather than being forced to increase to payment because the rates went up.

For the seasoned mortgagor, you may lect to take the short term product, but please set your payment at a reduced amortization, to coincide with the higher rate if, and when you convert.  In other words, as per our example above, take the 2.5% rate but take a payment at $640/month so when you convert, you know you can afford the higher payment because you're paying it now.

The old saying: "a bird in the hand is worth two in the bush" comes to mind when discussing fixed term rates rather than floating rates.