Tuesday, July 23, 2013

Mortgage Laddering

Historic low mortgage rates are still available today and depending on whom you speak to, could be here for a while yet.  These rates offer great downside on monthly costs, but as time passes, rates will inevitably rise, maybe not for a few years, but they will rise.

One important item to consider is that as fixed rates rise, variable rates drop and vica versa.  With the recent rally in the bond market, the fixed rate mortgages increased, but at the same time, variable rates dropped.  It is an interesting correlation.

Currently, many mortgage experts are suggesting "mortgage laddering".  It is a unique approach to handling larger mortgages.  Assuming you have a mortgage of $100,000, the suggestion was to break it into four piece of $100,000 and put different terms on each - variable, 1 year, 3 year and 5 year.  This would limit your risk of having all your $400,000 come due at once.  The idea is, if rates in 5 years are now 6%, having $400,000 due at 6% is worse than gradually having money come due every few years at different rates.

I like the strategy of doing 1 year terms and continually rolling your mortgages over.  I know this is too risky for some, so this might be an idea to try.  I suggest speaking to a mortgage professional at a bank to understand if this strategy is for you.

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