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Why variable rates are the better choice

April 20, 2010

Panic seems to be running through the minds of homeowners this week as a second round of rate increases kicked in. With the fixed rate settling around 4.39% (MCAP) and the variable at 1.75%, the variance between these two products hasn’t been wider in a very long time. As a result, the variable makes for the better choice and proof is in the math.

Here’s some assumptions:

1) If prime goes up by a quarter point (25bps) at the June, September, October and December meetings and then rises 25bps every three months starting in February 2011 which will result in the interest rate going to 7.00% by the end of the term; and,

2) The same payment is made on the variable as calculated at 4.39%

3) Negative amortization does not take place at 7.00% as calculated

4) $300,000 mortgage with 25 year amortization

5) Monthly payment of $1,642

Then the following mortgage balances at the anniversary date is:

Year 1 – Fixed $293,211 Variable $286,854 (variable at net 3.00%)

Year 2 – Fixed $286,121 Variable $276,825 (variable at net 4.00%)

Year 3 – Fixed $278,717 Variable $269,177 (variable at net 5.00%)

Year 4 – Fixed $270,984 Variable $263,853 (variable at net 6.00%)

Year 5 – Fixed $262,907 Variable $260,859 (variable at net 7.00%)

The variable rate based on these assumptions will still be $2,000+ ahead of the game!!!

I will bet anyone that Prime will not reach 7.50% in April 2015…..any takers??