Open and Closed Variablel Mortgage difference?

[fraction]

I dont know much how these thing work therefore asking this question.
i can get a 2.10% 5 year closed variable mortgage rate through my bank vs. 4.15% 5 years fixed.
Of course 2.10% looks more attactive to me but i dont know what is the catch. I asked the bank but they always tell that I can pick any product and there are absolutely no strings attached. But i do know that both have some financial implications. which i dont know what are the implications. By the way bank is RBC.
can some one explain me the difference between opean and closed variable mortgage rates?
i know there are some real knowledgeable people on this forum.

Thanks

[Rarasaurus]

You are talkign about two things
Open vs Closed
Variable vs Fixed.

Open means you are not tied to a number such as 5 years.
Closed means you are locked into the mortgage for 5 years. There are penalties to get out of a closed mortgage. That is why sometimes open is beneficial. However you will usually get better rates on closed since you are locked in.

Variable and fixed is the interest charged. Fixed means just that it is fixed for the 5 years you are locked in. So it could be 4.15%
Variable changes with prime. In your case you are offered prime minus 0.15. When the prime rate goes up so does interest.
Right now prime is at 2.25 i think, so if goes up to 4% your interest at that point would be 3.85%.

Variable historically has been better for people however lots of people lock into fixed for the security of knowing it wont go up.

[lint]

don't confuse open and closed with fixed and variable. Fixed and variable are talking about interest rate options. Open or closed can apply to either. An open mortgage means it can be paid off at anytime without penalty. A closed mortgage means that even if you had the means to pay it off, there would be some penalty for paying it off early. Although most closed mortgages have good repayment options anyways, and typically come with better interest rate terms.

Edit: damn, too slow

[Xtrema]

IMO, interest is about to go up. Fix it for 5 years if you know you can commit to it.

[aypi]

another question is if you are locked at variable and the interest rate goes up from let say 2% to 4%, will your monthly payment increase too?

[craigcd]

Originally posted by aypi
another question is if you are locked at variable and the interest rate goes up from let say 2% to 4%, will your monthly payment increase too?

I believe your mortgage payment will remain the same with a different amount being applied to the principal. That might vary depending on the type of mortgage, im not sure.

[Z_Fan]

Your monthly payment does not change when the interest rate changes on a variable rate mortgage. What changes is how much interest accrues, and therefore how much you are effectively reducing your total loan by with each payment.

At least, it doesn't in my variable rate mortgage which is prime less 0.75.
:poosie:

[Xtrema]

Originally posted by aypi
another question is if you are locked at variable and the interest rate goes up from let say 2% to 4%, will your monthly payment increase too?

Varies depends on the contract. You can either lower principle to keep payment the same or raise monthly payment to keep principle the same.

[mr2mike]

Wanna run this thought by you guys. May help OP too. I'm in an open variable right now and am watching the rates. I know they're frozen with a decision to be made in the coming months. Most likely they won't raise them too high out of fear of ruining our fragile economy and they'd rather devalue the dollar. That aside...

If I go as long as I can on a variable rate then lock in when the rates start to rise, will that be more beneficial? Or locking in now? Or is it totally dependent on where the rates will be in 5 or 6 years?

[aypi]

thanks guys. because right now i'm on my 4th year on variable @ 2%. 1 more year and i have to renew, just getting some ideas.

[Rarasaurus]

I have looked into variable vs fixed for a while as i have to choose. There was a stat i read in an article that said in the past 30 years if one picked variable they would have been better off 82% of the time. Source:
http://www.ctv.ca/servlet/ArticleNews/story/CTVNews/20091026/mortgage_rates_091026/20091026?hub=Canada

That being said i think variable is a better way to go most of the time. However we are now in a special situation. The way i see it is the banks offer fixed for people that seek that "security" but like with any insurance there is a price to be paid. I am sure banks put their fixed rates so that they make money while still making it look good to the buyers. With fixed rates at 4% or slightly less for the next 5 years i think it shows banks do not believe rates will come up fast.

Banks right now are predicting that rates will average 4% for the next 5 years, otherwise they would not offer 4%. BTW that 4% also includes a margin of error to cover their ass because banks are out to make money not lose it.

I'm no professional but i slept at a holiday inn express and will be going with Variable.

[mr2mike]

Thanks for the input and insight Rarasaurus.

[fraction]

Thanks for the help.

[Supa Dexta]

I just ran the number on a fixed vs variable rate for 200k at the current rates. Over the next 5 yrs you'd pay ~17k more going with the current fixed rate... But that said, variable will change and close that gap somewhat.