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 [Should we stick to our fixed rate mortgages?]

 The fixed rate mortgage was one of the major options for home financing in the recent past. This meant that borrowers were tied in to a fixed interest rate throughout the term of their loan and paid fixed repayment amounts each month. All this went well for the real estate industry until interest rates soared and lenders came up with the adjustable rate mortgages which were 2 to 3 percent lower.

Mostly tacked to US Treasury Bills, the rates for these mortgage loans dipped when the index of the Treasury Bills dropped, many home owners have considered refinancing to switch their fixed rate mortgages to adjustable rate loans or flexible payment adjustable rate mortgages.

Fixed rate mortgage warning

However, there are many benefits to switching, but there are also many valid reasons to keep the existing loan. For one thing, over the long term, repayments for adjustable rate mortgages may turn up to be higher as compared to fixed rate mortgages which are fixed throughout the whole repayment term. Also, if the equity of the existing loan has already been paid over the long term, switching actually results in additional borrowings based on this equity. This means the borrower does not end up owning the house within the shorter timeframe left, but rather obtaining more money based on the equity that is refinanced, and committing to another long term repayment period.

Another reason to stay put is the intention of the borrower to remain staying in the house for a long time, or does not intend to sell the property in the short term. This is because adjustable loan rates are fixed for a period of time until after a certain period in which the rates are made to fluctuate according to the market. Therefore this type of loan will especially benefit those who do not intend to move from their houses within the short term. Finally, the total refinancing costs involved may also outweigh the benefits of cost saving, which would make sense to keep the current mortgage.