THE 30 YEAR FIXED RATE MORTGAGE FALLACY

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If you don’t want the lowest interest rate for as long as you own your home don’t bother reading this.

Everyone (except me) is telling you to just take a 30 year fixed mortgage.

 I’m saying that may be true for a lot of people, but is not true for the majority.

Q1. Are interest rates on 30 year fixed mortgages at all time lows? YES

Does this mean that everyone buying or refinancing should get a 30 year fixed mortgage? NO

Q2. Are interest rates on 5 and 7 year fixed rate ARM’s also at all time lows?  YES

Q3. Is the interest rate the same on all types’ of loans? NO

The rates on both 5 and 7 year ARM’s are substantially lower than the 30 year.

Q4. Is the difference worth bothering about? YES

Take a $300,000 30 year fixed mortgage at 4.0%. Payment is $1,432/m

Take a $300,000 7 year fixed ARM at 3.75%. Payment is $1,389/m. Savings after 7 years $3,162.

Take a $300,000 5 year fixed ARM at 3.5%. Payment is $1,347/m. Savings after 5 years $5,100.

Q5. If Bob and Alice are buying their first home and plan to start a family after 3 years is, it likely that the nice little 2 bed, 2 storey townhouse they get will suit them for the next 30 years? NO

Q6. Would it be smart for them to take a 5 or 7 year ARM and save thousands of dollars which will be useful when they inevitable move up to the detached house with a garden when the children come along. YES

The golden rule of mortgage selection is that one size does not fit all.

Your mortgage should be the one best suited for you at this time in your life and considering your future plans and expectations.

IF YOUR LOAN AGENT DOES NOT ASK YOU HOW LONG YOU EXPECT TO BE LIVING IN THE PROPERTY THEN THEY CANNOT ADVISE YOU WHAT WILL BE THE BEST LOAN FOR YOU.

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