Picking Between a 4 or 5 Year Fixed Mortgage
When shopping for mortgage rates, most people gravitate towards 5-year terms, as this is what has become ‘standard’. This doesn’t mean a 5-year term is right for everyone, and in some cases, a shorter-term mortgage can make more sense. There used to be a time when shorter-term mortgages carried lower rates than the longer-term options. However, in the last few years, the lowest rates were almost always for 5-year terms. As a result, the demand for shorter-term mortgages all but disappeared.
Fast forward to today.
5 year rates are now more competitive than ever, however, the shorter-term rates are starting to make a comeback with some pretty hot deals. One exception is with variable-rate mortgages. Variable rates are almost always five-year terms. There is no such thing as a 1, 2, or 4-year variable rate. There is the odd 3-year variable, however, they are usually quite high compared with the five-year terms (with the odd exception). Usually, when discussing mortgage term length, we are talking about fixed mortgage rates only.
Some lenders may offer a 3 or 4-year special rate that is lower than the 5 year fixed options in order to catch attention. Everyone loves seeing a lower rate on paper!
For example, the lowest 5 years fixed for an insured purchase (less than 20% down payment) is currently 1.69%. The lowest 4 fixed for the same mortgage is currently 1.64% or 1.44% for a 3 year fixed. When the term length drops below 3 years, the rates increase above the lowest 5 year fixed options.
Many people are drawn to the lowest rate. But the lowest rate does not always equal the lowest cost mortgage. If that was the case, then 100% of mortgage seekers would choose a variable given that the rate is lower than fixed. History has shown variable rates to be the winner over fixed for the past 40+ years. Nevertheless, many still prefer to go with the higher fixed rate for the peace of mind of having a guaranteed rate and payment for the term. There is nothing wrong with that at all! What’s right for one person might not be right for another, which I explain in detail in my blog on the mortgagevisionsIn Choosing Fixed Or Variable.
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