The number one question to ask about your next mortgage is not whether you got the lowest possible interest rate, or how fast you’ll pay it off. Instead, ask yourself this: How much stress will your mortgage cause you in the years ahead?
If the lowest rate mortgage fries your nerves, it’s arguably not the best deal.
De-stressing your life as a home owner in this rate environment requires some fresh thinking, such as considering the merits of a 30-year amortization instead of the traditional 25 years. If you have a down payment of less than 20 per cent, you’re stuck with a maximum 25-year amortization. By putting down 20 per cent or more, you open up the possibility of going to 30 years.
The longer amortization means lower payments at the cost of more interest paid over the life of the mortgage. Minimizing interest costs is really important, but there’s value in having a mortgage that gives you room to breathe. That makes it easier to afford home upkeep, start a family, make your car payments and save for retirement without running a perma-balance on your credit card or line of credit.
Borrowers who have down payments of 20 per cent or more are using 30-year mortgages these days. A typical example would be working spouses who will go down to a single income in a few years when they start a family. They are willing to pay more on interest for the flexibility of having a lower payment. They know there is a premium involved, but they are willing to pay it.
The actual interest costs could be slightly higher because lenders offering 30-year amortizations typically charge a small rate premium over 25-year mortgages, say about 0.25 of a percentage point. But 30-year mortgages are about flexibility and comfort, not cutting interest costs to the bone. One further cost of the 30-year mortgage is the extra years it takes to pay your debt in full. But with people living and working longer, it may be that these extra years can be absorbed without problems. Similar logic can be applied to the question of whether to go with a variable or fixed rate. Past experience shows variable-rate mortgages have generally offered lower rates and thus less interest cost.
But there’s a psychological side to this argument as well. People who bought a first home since 2008 have no experience with steady interest rate increases – they’re used to rates being a benign force in home affordability. Experienced home owners may take this change to the rate outlook in stride, but nervous types and rookies will agonize over each move higher in rates if they have a variable-rate mortgage.
Expensive houses and rising rates make people desperate to get out from under their mortgages as soon as possible, which is definitely smart personal finance. But a mortgage has to fit your life. If you make your life fit your mortgage, there will be stress.
Give me a call today to find out if setting up a 30 year amortization is right for you.