A mortgage broker in our office sent out some great information that i thought i would pass on (from Ian Lawrie)
here it is:
Higher Rates & Longer Amortizations
At the beginning of 2007 the best 5 year fixed mortgage rate was 5.04%. As of June 25, 2007 the best 5 year fixed rate is 5.79% . This represents a 15% increase in the cost of borrowing. Indications are that, absent significant events, mortgage rates will remain stable through the end of the year.
Now, what the heck do we do about the higher mortgage payments? The answer is to take advantage of a new facility offered by our lenders - longer amortizations! Up to 40 years!
While no one wants to pay any more interest than necessary, being able to acquire a home with manageable payments is, I would suggest, most peoples' objective. And a noble objective it is.
- A $100,000 mortgage at 5.04% amortized over 25 years has payments of $584.00 per month.
- A $100,000 mortgage at 5.79% amortized over 30 years has payments of $582.00 per month. Hey, our payments are lower!
- A $105,500 mortgage at 5.79% amortized over 35 years has payments of $582.00 per month. Hey, we can buy more home!
- A $109,600 mortgage at 5.79% amortized over 40 years has payments of $582.00 per month. Hey, we can buy a lot more home!
Now, if we assume that the extra $9,600 investment in the property increases in value at 5.00% per year that's $480. The difference in interest between 5.04% and 5.79%, on a 40 year amortization, is only $70 over the year. You are $410 ahead.
Buying more property with a longer amortization can be a positive investment strategy.
Remember that most mortgages can be prepaid by way of increased monthly payments and/or intermittent lump sum payments.