Mortgage rates recently hit a low for the year and they are near historic lows. Right now, you can get a 30-year fixed rate mortgage for a rate of about 3.65%. A 15-year fixed will only cost you a rate of about 2.75%, assuming good credit.
If you are buying a house or refinancing your house, then I generally recommend a fixed-rate loan, assuming you are planning to stay there a while.
(As an aside, if you aren’t planning to live somewhere for long, then you probably shouldn’t be refinancing or buying in the first place, unless you are planning to keep the property for investment purposes. But if you are going to sell in the near future (within 5 years), you are going to get eaten up by closing costs, agent fees, and the other expenses of home ownership. It is not worth it.)
If you had asked me 10 years ago, I would have said to get a fixed rate mortgage. I would have been wrong in the sense that your payments would have been lower with a variable rate. I wouldn’t regret recommending that though, because it is a little bit like insurance. I don’t regret recommending that someone get insurance for something just because, looking back, nothing bad happened.
So it is not that I am betting on higher rates. It is just more of an admission that we can’t predict the future.
Actually, if I had to guess, I think rates will probably go down in the near future. I may be in the minority of libertarian opinion on this. Some libertarians have been predicting much higher rates for many years and it has failed to come to fruition. Rates will eventually go higher, but what if it is another decade or more? I don’t think it will be this long, but it isn’t useful to say that rates will go higher without any time reference at all.
If you are taking out a 30-year mortgage, it is basically impossible to predict what rates will be in 20 or more years. We could be like Japan for the last couple of decades where there have been really low (now negative in some cases) interest rates. We could also be like the U.S. of the 1970s with double-digit interest rates.
So if you are buying or refinancing and plan to hold the mortgage for a long period of time, it just generally makes sense to go with a fixed rate mortgage.
There are still times when it makes sense to get a variable rate. The rate will start out lower than a fixed rate because you are absorbing some of the risk.
But if you are getting a 15-year mortgage and the principal balance to start isn’t all that high, it might make sense to take a little extra risk and go with a variable rate, especially if you are in a good financial position.
Let’s say you only have a mortgage balance of $80,000 left on your house with about 15 years to go on the loan. You can refinance with relatively low closing costs. You can refinance to a 15-year loan, which is what you have left anyway. You can get a lower rate with a fixed rate or a variable rate, but the variable rate will be lower to start. There is no guarantee after that.
Since the balance is so low, there is not nearly as much risk in getting a variable rate. As the balance is paid down, the risk gets less and less. If rates spike in 5 years, you can always make the decision to pay down the principal balance more aggressively if you have the extra funds to do so.
When deciding on a mortgage, or really almost any financial decision, you really have to consider all of the factors in your life that will be unique from anyone else. The key is to know what the important factors are and how much weight they carry.
This is why it is hard to make blanket statements such as “You should always get a fixed rate mortgage.” There are some people who really should get a variable rate mortgage. Even your personality may affect your decision.
I expect rates will stay low for a while longer because of recession fears. But if you are buying a house for the long term, then it typically makes sense to get a fixed rate so that you can sleep at night and not worry about what your monthly payments will be next year.