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Simple answers to Complex Questions and Complex Answers to Simple Questions. In real life, I'm a Greater-Toronto (Canada) Realtor with RE/MAX Hallmark Realty Ltd, Brokerage. I first joined RE/MAX in 1983 and was first Registered to Trade in Real Estate in Ontario in 1974. Formerly known as "Two-Finger Ramblings of a Forensic Acuitant turned Community Synthesizer"

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Thursday, September 16, 2010

Should I pay the penalty and refinance my mortgage?

Q.......What do you know about mortgage rates just now? 

I was going to move my 5.1% mortgage down to 3.79% mortgage for a fee of approx. $3500.00. 
The 5.1% mortgage is up in 20 months.  This 3.79 would last for 60 months. 

It's hard to tell if the interest rate will go up that much in 20 months, but what have you seen in your line of work over the years when there is a recession regarding mortgage rates?

A.....On the mortgage question:

$3500 penalty on 20 months is $175/month ... will you be saving that amount per month with the 1.31% reduction?
If the 3500 is arranging fees to a broker, that's a lot.
If that sum is the arithmetic calculation of the "interest differential" between 5.1% & 3.79%, then you're just prepaying the interest now (that you would have paid over the 20 months)

If you're increasing the principal amount to cover the $3500 .... it's no gain.

Historically 5.1% is a great rate for a 5 yr first mortgage

-5 yr rates are now about 3.5%-3.99% and should stay sub-4% for at least 1 yr and then ease upwards gradually (depending on USA rate increases, which depend on the progress of their screwed-up economy's recovery, which depends on a great # of things going "perfectly")

What abbout VARIABLE rate mortgages?
Examine the possibility of going to a variable (they are prime minus ~ 0.75%) around 2.25% -2.65%.
NB the lowest-cost Variables also have a "closed term" ie you commit to the arrangement for a fixed # of years. The "fully open" variables are a higher rates.
-the Bank of Canada rate and the corresponding Bank Prime rate would have to go up 1% to 1.5% for the variable mortgage to be the same rate as the 3.79% you are being quoted now.

The 'test' is comfort. If you'll be uneasy with a variable rate and "can't sleep at night" thinking about it .... take a fixed, but calculate carefully the penalties and fees, +legal costs as interest costs. Calculate them into the total interest costs over the full term of the mortgage you select.

OTHER TERMS (less than 5)

Or consider the refinancing on a less-than five yr term

If $3500 pays out all discharge fees for your 5.1% existing, then you are free to pick any term you wish.

Your existing lender is the first choice ..... but if they aren't giving you any concessions (&their best-best rate) after you paying the $3500 EARLY.

Then shop .... any institution where you have existing accounts or business - they know you already .... AND will be most willing to grab a "safe mortgage & good customer" from the other institution.

As of Last Thursday Sept 16th

1 yr "best available"rates are ~2.5%

2 yrs ~ 3.2

3 yrs - 3.34

4yrs -3.49

5yr- 3.59

These rates s/be increasing at 0.25% per yr or 1.0% between 1& 5yrs rates

But they're not.

The 2,3,4,5yr terms are less than 0.4% apart in total, while the gap between 1 & 2yrs is 0.7%

The 5 yr rate and the one yr are "correctly" aligned (1.1% differential) .... but the banks are setting a false premium on the rates for the "not-too-short & not-too-long" rates so that nice, cautious, Canadians (who will opt for the "middle one") will get slightly gouged.


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