Is a 2 or 5 year fixed mortgage better?
The answer depends on individual circ*mstances, financial goals and risk tolerance. Those seeking short-term affordability and flexibility may find a 2-year fixed rate mortgage more suitable, while those prioritising stability and long-term planning may lean towards a 5-year fixed rate mortgage.
Fixing your mortgage for longer can give you greater certainty as you'll know exactly what your mortgage repayments will be for the next 5 or 10 years. However, fixing for a longer term normally comes with higher interest rates - although rates for 5 year deals are lower than 2 year deals at the moment.
Longer-term mortgages cost less per month because the repayments are spread over a longer-term. However, this means that your mortgage will cost you more overall because you will be charged more interest over a longer period.
If, rather than going for a 25-year term, you choose a 30-year mortgage then your monthly payments will be reduced, giving you more cash to spend on things that are important to you. If you've struggled to get enough capital together for a deposit, a longer mortgage term makes owning a house more affordable today.
A potential downside to fixed-rate mortgages is that when interest rates are high, qualifying for a loan can be more difficult because the payments are typically higher than for a comparable ARM. If broader interest rates decline, the interest rate on a fixed-rate mortgage will not decline.
Lower interest rates convert to cheaper repayments
The idea of taking out a fixed-term deal is that you'll get a preferable, predictable option, and a 5-year fixed rate should be considerably lower than the current standard rate. However, the gamble is that the base rate can drop as well as rise.
But while the Fed raised its benchmark rate fast in 2022–2023, it's expected to bring rates down at a much more gradual pace in 2024 and beyond. As a result, any mortgage rate improvements are also expected to be gradual.
Forecasters believe mortgage rates may fall further in 2024, meaning it may be wise to opt for a variable rate or tracker mortgage for the time being, and fixing your mortgage once rates do slide. For a more accurate steer, it's a good idea to engage a mortgage advisor when you're ready to choose a mortgage.
One significant disadvantage of taking out a mortgage is the long-term financial commitment involved. Depending on the length of your mortgage term, you may be making monthly payments for decades, tying up a significant portion of your income.
Most of the time, your monthly mortgage payments will increase since you have a shorter timeframe to pay off the loan. This could be a significant financial burden for those who can't afford a higher monthly payment.
How big of a mortgage is too big?
While the Consumer Financial Protection Bureau (CFPB) reports that banks will qualify mortgage amounts that are up to 43% of a borrower's monthly income, you might not want to take on that much debt. "You want to make sure that your monthly mortgage is no more than 28% of your gross monthly income," says Reyes.
Product | Interest rate | APR |
---|---|---|
30-year fixed-rate | 6.842% | 6.924% |
20-year fixed-rate | 6.729% | 6.823% |
15-year fixed-rate | 6.129% | 6.274% |
10-year fixed-rate | 5.828% | 6.028% |
The average length of a mortgage is 30 years, but that's not the amount of time that most borrowers will keep the loan. Homeowners only stay in a home for eight years on average, and many refinance their home loans. So most folks will sign up for a 30-year mortgage but keep it for a far shorter time. Why 30 years?
Borrowers who prefer predictable payments generally prefer fixed rate loans, which won't change in cost.
Many consumers prefer fixed-rate mortgages because the rate remains constant for the life of the loan. This provides them with a guarantee that the loan won't change even if interest rates go up. It also provides borrowers with predictability since they always know how much they'll have to pay.
Those who want certainty over their repayments for the foreseeable future may be better off with a longer-term fixed-rate mortgage – but if the next couple of years see rates fall considerably, they may end up stuck on an expensive deal.
Those keen to have the security of knowing how much their mortgage will be each month may prefer to opt for a 5-year fixed-rate deal. A lot can happen in 5 years, however, so think carefully about your family setup and also how you would feel if interest rates are suddenly cut.
Higher interest
With a protracted loan term, there's a greater chance something might hurt your finances and lead you to default before the loan is fully repaid. Even when the interest rate on a long-term loan is the same as a shorter term, you will still pay more in interest over the life of the loan.
Can I Move House During My Fixed-rate Mortgage Period? You usually can move house during your fixed-rate period providing you can afford any fees involved. But whether you should or not, and if you do, whether you should move your existing mortgage or take out a new one, are different questions.
In summary, it is unlikely that mortgage rates in the US will ever reach 3% again, at least not in the foreseeable future. This is due to a combination of factors, including: Higher Inflation: Inflation is currently at a 40-year high in the US, and the Federal Reserve is raising interest rates to combat it.
What will mortgage rates be in 2025?
Goldman said it expects 30-year mortgage rates will drop to 6.3% by the end of 2024, and fall slightly in 2025 to 6% as the Fed starts to cut interest rates. Previously, Goldman had expected the 30-year mortgage rate to be at 7.1% by the end of 2024 and at 6.6% by the end of 2025.
Lawrence Yun, chief economist at the National Association of Realtors, even told CNBC that he doesn't think mortgage rates will reach the 3% range again in his lifetime.
It's impossible for anyone to know what the future holds, so the decision whether you should fix your mortgage now or wait really depends on what you personally think is going to happen to rates in coming months, and whether you need the absolute budgeting certainty that a fixed rate provides or not.
Source | Projected 30-year mortgage rate (by end of 2024) |
---|---|
Mortgage Bankers Association | 6.1% |
Fannie Mae | 5.8% |
Realtor.com | 6.5% |
Redfin | 6.6% |
Mortgage rates will decrease in 2024, and buyers will pay fewer discount points. By summer, first-time home buyers should expect current mortgage rates near 4.25 percent.
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