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Doesn't matter. You can refinance when interest rates inevitably go down. A 4-8% discount multiplied by 5:1 (or 33:1 leverage) is ENORMOUS. It dwarfs an extra
by onlyrealcuzzo 4y ago
Doesn't matter. You can refinance when interest rates inevitably go down.
A 4-8% discount multiplied by 5:1 (or 33:1 leverage) is ENORMOUS. It dwarfs an extra 5-10% monthly expense for a year or two or three.
Especially considering R/E capital gains are mostly tax free.
- dagw 4y agoYea, I forgot that the US allows free refinancing of mortgages when interest rates drop. That completely changes the calculus.
- dacohenii 4y agoIt's not free; it usually costs a few thousand dollars, so there is a payback calculation to make.
- refurb 4y agoFree in the sense you don't pay a penalty. In Canada, if you refinance before your mortgage term end it's typically to pay 3 months of interest as penalty or the difference between your new rate and the old rate until the term ends. It's pretty damn punitive.
- pessimizer 4y agoWhat's the rationale behind that? That's really a penalty for early repayment - is it set by law, or is it just something that is part of a standard Canadian mortgage contract?
- dagw 4y agoHere in Sweden if I have a fixed rate mortgage and want to repay early or refinance at a lower interest rate, I have to pay a penalty which is essentially equal to what the bank is losing in out on in 'missed' interest payments.
- onlyrealcuzzo 4y ago30-year fixed rate mortgages should not exist. They only exist in the US and Denmark: https://www.thediff.co/p/the-30-year-mortgage-is-an-intrinsically-toxic-product-200c901746a?triedSigningIn=true https://www.thediff.co/p/the-30-year-mortgage-is-an-intrinsi... And they only exist because of A LOT of government intervention. If interest rates don't continue to only go down - I imagine you'll see them disappear in the US and Denmark. US & EU banks mostly make their mortgage profits from constantly refinancing at ever lower rates.
- refurb 4y agoYou are right that they wouldn’t normally exist without government intervention. But banks don’t profit off the interest rate on mortgages. It’s mostly origination fees. Mortgages are sold off immediately. They don’t hold onto them.
- Marsymars 4y agoIt’s just standard. The standard Canadian mortgage contract is for a 5-year term with a fixed rate. Variable rate mortgages have notably lower costs to end early. (Early repayment terms are typically something like “can optionally pay up to 15% extra per year without penalty.”)
- jermaustin1 4y agoNot sure what you mean by free. But there are time time frames where you are barred from refinancing (not within 6 months of closing on a mortgage - including the refi, so you are in a timing the market kind of situation), and the fees (appraisal, closing costs, origination, points, etc.) that go along with refinancing are usually pretty steep.
- cudgy 4y agoRefinancing is not free. There are still costs for any loan like appraisal, possibly an inspection, and recording fees, but some lenders will roll those costs into the loan or offer higher interest rates to offset their costs. Nonetheless, I’ll take the lower principal of a lower priced house than an over-priced house with a lower interest rate … lower taxes and possibility to refinance at lower rates.
- Finnucane 4y agoWhen we bought in 2009, the rate was 4.85%. Later we got it down to 3.5%--a difference of over $400/mo. At this rate we'll have it paid off completely 14 years early.
- halfmatthalfcat 4y agoWhen are rates going back to under 3%? That was a flash in the pan phenomena, I highly doubt that would ever happen again absent some other cataclysmic event. The current rates are more toward the contemporary average.
- onlyrealcuzzo 4y ago> When are rates going back to under 3%? That was a flash in the pan phenomena, I highly doubt that would ever happen again absent some other cataclysmic event. This is what everyone said after the financial crisis. 3 years after rates moved up from 0% (~2018) - the 30-year mortgage rate hit an all-time low (~2021). I'm not sure how you can be so confident they're never going lower this time. And I'm completely lost how you can be confident they won't be lower than they are now within a couple of years...
- halfmatthalfcat 4y agoYou're completely lost, after looking at the last 50 years of rates, at the chances of it falling to 2021 lows? We're talking probabilities here and I'm confident the probability is very low.
- onlyrealcuzzo 4y agoSo you observed the last 50 years of rates, and you don't see a downward trend?! In every country in advanced world??
- bkberry352 4y agoVery low probability? No way. They push the rates lower than ever before during each crisis, we just have to wait till the next one.