With mortgage rates poised to go up—how much longer can this last?—the big question on people’s minds is this: Should I take the lower variable rate and the savings that come with it, or lock in now for the long term?
The decision looks like it requires a crystal ball on where rates are going. But it doesn’t. It’s a much more pragmatic decision than it at first seems, with a checklist of things that will naturally guide you to your answer.
1. How’s your income and is it stable? If you’re taking a mortgage that’s tighter than Cinderella’s shoes on her ugly step-sister’s feet, you’ve got to lock in the payment you can manage for as long as possible. Ditto if there’s any potential instability in your income stream. If you’ve got a steady income and wiggle-room in your cash flow, the variable rate might save you some money.
2. How high is your debt ratio? If your debt ratio is high because you’re carrying all kinds of other debt—student loans, a car loan, credit card debt, a line of credit, consolidation loan—then any significant jump in the prime rate will leave you feeling like Hulk Hogan is squeezing the life out of you! You’ve not only got to go with a fixed rate, you’ve got to make a plan to get the hell out of the ring!
3. How much do you have socked away? If you’ve got a big enough emergency fund—a minimum of six months’ essential expenses—you’ll have the buffer you’ll need to deal with a rise in interest rates. No emergency fund? Go with a fixed rate mortgage.
4. How well do you sleep at night? Not everyone has the stomach to watch the markets and deal with the anticipation of things changing. If you have the time and the temperament to deal with the interest rate rises and falls, you’re a good candidate for a variable rate mortgage. Otherwise, stick to a fixed rate.