Which Mortgage term is ideal in 2024?
In times like these homeowners and homebuyers are left trying to determine what is the ideal mortgage term in 2024? With many economists predicting rates going down you may be thinking of taking a shorter term. But is that the right strategy for your mortgage?
Short term strategy
The real benefit to taking a shorter term such as a 1 year, 2 year or even 3 year term is that you aren’t under contract for as long of a period. So if you are planning to move in 3 years or less you wouldn’t necessarily need to break your term to do that. As we all know breaking a term early can lead to costly penalties. But does taking a shorter term have benefits for being able to take advantage of lower rates?
What is the risk with a shorter term?
The problem with going with the short term strategy if you think rates are going to drop is you are essentially attempting to time the market. Lets say you go with a 2 year fixed closed term. You take this term because you believe rates are going to drop in 2 years. If they happen to drop at the time of your mortgage maturing in exactly 2 years then great! You’ve just successfully timed the market. Win! What happens though, if the rates drop after only 1 year? You want to be able to take advantage of those lower rates but you are still locked in for 1 more year. Now you either have to keep your mortgage as is and hope those lower rates are still available in 1 more year or you have to pay a potentially large penalty to break the term and be able to get those new rates.
It is not necessarily bad to take a shorter term but timing the market is extremely difficult to do and you are limiting your ability to jump on lower rates at anytime. The other downside is that typically rates on a shorter term are higher than a longer term. If rates don’t drop enough in those first years you may not have saved anything at all.
Long term variable rate strategy
Is a variable mortgage term ideal? This strategy can be a great option for a mortgage borrower who thinks rates will be dropping. As mentioned above timing the market is very difficult and most often doesn’t work out on the exact timeline we need it to. This is where the variable rate can come in. It is generally offered as a 5 year closed term but it has some flexibility that a fixed rate term does not offer. If your mortgage is a variable rate you can lock it in at ANYTIME without penalty. This can be a great option because as soon as you see the rates drop to the threshold you are looking for you can lock it in to a new fixed term that is equal to or longer than your current remaining term. This eliminates the need for trying to time it correctly and any potential penalties to get the lower rate.
The risk with the variable is that you are on a floating rate so you are susceptible to rate fluctuations if prime rate is changed. Additionally if the rates do not drop your strategy may need to change.
Long term fixed rate strategy
A 5 year fixed closed term is a popular option. Over the course of a 25 year mortgage you will see highs and lows in the interest rates. Hopefully your renewals will coincide with at least a few of those low periods. Rate fluctuations are normal and believe it or not where our rates are at right now is pretty normal and historically speaking they aren’t that high. We had been getting used to some very low rates that would be considered unusually low. It is a good idea to adjust your budget and expectations according to the interest rates we are seeing today as they are more typical. A 5 year fixed allows you the security of knowing what your rate and payments will be for that time period.
There are certainly some risks to any term you take. As we can’t always accurately predict the future. The best thing you can do is contact a mortgage broker professional. We can give you a multitude of different rate options and customize our advice to your situation.
Jessica Kriekle
Mortgage Associate
Mortgage Alliance Advance Mortgage
