Mortgage Advice

[ING_rep]

Hi!

I'm in a particular situation with my mortgage coming up and I'm debating what to do with it.. Maybe your opinion and advice would help!

We currently have 2 houses, one that has no mortgage on it and that we are selling soon, and one that we bought last October to renovate and that we'll be moving in shortly. We took a 1 year mortgage in this new house, and it's coming up in November. Once the house we live in sells, we'll be able to clear the mortgage. My question is.. should I renew the mortgage for another year? Or extend month to month?

We have 300k left on mortgage, month to month is 3.2%, or if I renew for a year, we could get 2.5%... but we'll pay for 12 months, whereas if we extend, it will be less than 12 months, but it all depends on how long it takes for our house to sell.

Any advice? Are there any other options?

Thanks!
K

[Arjon]

It seems likely that there's no "right" answer since either option might be better depending on various possible factors, like where you sit in the range from planning to price your house to sell quickly vs. intending to wait for a high(er) price.

[brunt]

I believe that the reason that the correct choice is not clear is that it is entirely dependent on the outcome of an external event - the time required to sell your house.

It may help to think of things in a different light.

Let's look at what happens in three cases - 1) your house sells early (think day after you take out the mortgage), 2) your house sells halfway through the year, or 3) your house sells at the end of the year or does not sell within the year. We will calculate the costs for the open mortgage (month to month) and closed.

House sells early:
Open costs $0, closed costs $1,870 (3 months penalty).

House sells mid year:
Open costs $4,800 (6 months at 3.2%), closed costs $5,620 (6 months at 2.5% plus 3 month penalty).

House sells end of year/house does not sell:
Open costs $9,600 (12 months at 3.2%), closed costs $7,500 (12 months at 2.5%).

So basically I see this as a bit of a tossup, with a slight bias to the open mortgage if you think that the house will sell by June or so, and a slight bias to the closed mortgage if you sell after that. The reason that the decision is difficult is that you don't know when/if your house is going to sell.

One note, the sting of paying the penalty of the closed mortgage may be lessened by the fact that you only pay it in the case of a sale, whereupon you will become mortgage free and will be saving interest anyway. Making a "wrong" decision is always made easier with zero debt as a result.

Note that I have assumed that rates will not fall during the upcoming year. If they were to (but I doubt that), then the bank may charge an extra fee called the interest rate differential for paying off your mortgage early. The amount would depend on how far rates fell. I did not include this in the above calculations since I do not think that it will happen.

That's one thing that the Americans have on us, not only is their mortgage interest tax deductible, they do not pay a penalty if you pay off your mortgage for any reason.

[tjthemanto]

It will also depend upon how many years amortization you go for.

1 year at 2.5 % for 25 year amortization, the interest cost you will pay for that 1 year will be way more than say its a 15 year amortization.

Just go for a 3.2 % open mortgage ( month to month ) with no pre-payment penalty for paying it off early, if you are confident you can sell your house in the next 3-4 months for the price you want. But with winter & holidays coming and Real Estate generally slow during this time, you might not get the price you want or a quick sale.

So you might be better off with a 2.5 % for 1 year and go for an aggressive amortization of say 15 year amortization, instead of the typical 25 year amortization, if you can afford the higher monthly payments, which comes with a lower amortization. You will pay less interest and more towards the principle if you do a shorter amortization.

[dyalect]

rent out house with paid off mortgage and chop down the current one. mortgage free on both sounds good to me.

renew for as long as possible. rates are only going one way. (up!) lock in non-variable.

[ING_rep]

Ok! So I have decided to resign 3 months at a time, at 3.04%

I have locked-in the same rate in advance for the next 3 months, so it's actually 6 months at 3.04% should we not sell the house where we live currently.

Thanks for all the advice!