Real Life: How Long and Short-Term Interest Rates Affect You

John in Real Life, Money, HomeBuying

Ed note.  Real Life is a periodic feature detailing stories about the situations HomeBuyers encounter in the real world.

In my previous post, I showed how all interest rates do not move in unison and that mortgages are actually influenced by two types of interest rates: long-term and short-term.  Today I’ll show you how long- and short-term interest rates may influence your financing decision.

When talking to your mortgage specialist about variable  vs. fixed rate mortgages, be sure to ask what direction short term (variable) and long term (5 year fixed) interest rates are going in (since we now know that they don’t necessarily move together).

Suppose your mortgage specialist tells you that short term interest rates are expected to stay constant over the next three months but long term interest rates are expected to drop.  What does this mean to you as a HomeBuyer?  Even if you would like a 5 year fixed rate mortgage, you may want to consider getting a short term variable-rate mortgage today while you wait for rates on 5 year fixed rate mortgages to drop over the next few months.  When and if rates drop, you can then lock in your fixed mortgage at the lower 5 year rate.

Keep in mind that economic forecasts are just that—forecasts.  Nobody ever knows precisely what direction the market is going to take, which is why so many HomeBuyers prefer locking in a fixed rate mortgage.  Beyond the economic analysis, it is important to consider how you feel.  Would you prefer to pay for security regardless of the markup involved or would you prefer to pay less for security and accept some degree of risk in doing so?  Before making any major mortgage decisions, ask your mortgage specialist to advise you on the risks of each option available to you and be sure to choose what makes sense to you, your wallet and your peace of mind.

John Pasalis is a sales associate with Prudential Properties Plus in Toronto and a founder of Realosophy.

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