How To Navigate Three Common Mortgage Scenarios
Friday Sep 01st, 2023
It’s a confusing time to be a homeowner. Rates are up, and everyone has an opinion on what will happen next. It’s easy to get sucked into social media rabbit holes and make decisions motivated by fear. But at times like these, it’s crucial to block out the noise and do what’s right for you.
To that end, here are three common scenarios along with my recommendations on how to save money and hang onto some peace of mind.
Scenario #1: My mortgage is up for renewal this year
The lowest rates you’ll find right now are 5-year fixed rates. That does NOT mean you should lock into a 5 year commitment. Rates will come down, and they could start as soon as Spring 2024. You don’t want to find yourself in a situation in a few years where rates have come down substantially and you’re still locked in for two more years at a much higher rate.
My advice? Go with a 3-year fixed rate term. I would recommend an even shorter term, but rates for a 1 or 2 year term are as high as 7%. A 3-year fixed rate mortgage allows you to lock into a relatively reasonable rate, ride out one more potential rate hike, then watch rates come down over the course of a few years before renewing again.
To summarize: a shorter term means a much higher rate, and a longer term means you could miss out on savings. A 3-year fixed rate mortgage is a perfect in-between.
Scenario #2: I’m in a variable rate with 2-3 years remaining on my term
In my opinion, you have two options. Number one is taking the route above and locking into a 3-year fixed rate. If you’re looking for consistent payments and peace of mind, this might be the best option for you right now.
Number two is riding it out. You’ve likely been on a bit of a rollercoaster ride with rates over the last year and a half. But any expert would agree at this point that there are far more opportunities for rates to go down than to go up. Depending on how quickly rates drop, you could end up netting out on top versus locking into a 3-year commitment.
Scenario #3: I need to consolidate my debts and lower my payments
Non-mortgage debt comes at a hefty price tag these days. Higher interest rates and higher payments can put you in a cash crunch situation. A great solution is to refinance or consolidate your debts.
Some lenders will allow you to break your mortgage or add to it. If it’s possible, I’d recommend this route. You can extend your amortization to 30 years with most lenders, and up to 35-40 with some alternative lenders. This can help you significantly lower your monthly payments and free up some cash. Once rates go down, or you have more disposable income, you can shorten the amortization and save money on your total debt.
The Bottom Line
Don’t act out of fear – but don’t be paralyzed by it either. There are many solutions to even the most complex situations. All you have to do is contact an experienced mortgage broker. They have expertise, insights, and most importantly, relationships with all kinds of financial institutions. Trust the professionals to provide the unbiased advice you need to make the best possible decision.