Why Are People Still Choosing Variable Rate Mortgages?

About 15% of new Mortgages are still Variable.

Today, Variable Rate Mortgages have higher rates and payments than 1, 2 or 3 year Fixed Rates. So why the Heck would people pick them?

I had this conversation yesterday with a mortgage shopper.

Him: They always work out better than Fixed

Me: Generally, yes, but not right now

Him: The penalty is lower for Variable

Me: Not if you take a 1 – Yr Fixed then absolutely the same

Him: Prime Rate is coming down

Someone, could be his Bank, could be a RE Agent, could be his random friend told him about the PIVOT and come Spring Prime Rate will drop which is wrong.

It’s a small group. The vast majority of clients chose Fixed Rates today and never longer than 5 years. So why Variable? For some it’s just habit, they had Variable for 20 years and did great so keep going.

Here’s the key technical reason not to: there MUST be a discount versus Fixed to take the risk of Variable and now there ISN’T. When Variable is 1.25 or more less than Fixed Rates.

A case can be made that is an adequate discount to take the risk of rising Prime (in 27 of the last 30 years it worked) but when Variable is a higher rate than Fixed it makes no sense at all. Particularly when the penalty for 1 year fixed is identical at 3 months interest.

• Ron Butler