With fixed rate mortgages at record lows and the constant threat of a rising variable mortgage rates, fixed rates are gaining in popularity. A few short years ago just over 50% of new borrowers were selecting fixed rate mortgages; today that number has dropped to more than 85%. And now with some very attractive 10 year mortgage rate offers you have to ask yourself, “is now the time to lock in for 10 years?”
Time for some mortgage math, but don’t worry I’ll do the heavy lifting! Today’s best 5 year fixed mortgage rate is 3.39% and the best 10 year fixed mortgage rate is 3.99%. So how high do rates need to be 5 years from now for you to be kicking yourself for not taking the 10 year option? Here’s a $300,000 mortgage example:
10 Year Fixed Mortgage Rate
A $300,000 mortgage amortized over 25 years at a rate of 3.99% will give you a monthly payment of $1,576.43 with a balance 10 years from now of about $213, 500.
5 Year Fixed Mortgage Rate
A $300,000 mortgage amortized over 25 years at a rate of 3.39% will give you a monthly payment of $1,480.45 with a balance 5 years from now of about $258,500. The break-even rate 5 years from now is 4.5% for your next 5 year fixed rate mortgage. This mortgage rate will give you a monthly payment of $1,628.44 with a balance at the end of the term of about $213,500.
The big question that remains is what will 5 year fixed mortgage rates be 5 years from now? Sorry, but my mortgage math can’t solve this one. Most economists agree that in a healthy economy the natural mortgage rate is between 5.50% and 6.50%. If you buy into that theory then 10 fixed is the way to go.