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Too soon to bet against a variable-rate mortgage?

Interest rates falling on a house.

Robert Paternoster/Getty Images/iStockphoto/Robert Paternoster/Getty Images/iStockphoto

When it comes time to renew your mortgage the question always comes up: How much money are you leaving on the table if you opt for fixed rate over variable?

Academic studies indicate that the best predictor of future interest rates is the current yield curve. Based on that, interest rates are going to be pretty low for the foreseeable future. Add in some shallow discounting off prime for variable-rate mortgages and it's easy to see why almost everyone is opting for fixed-rate mortgages these days. Even a new player on the mortgage scene has decided that a five-year fixed-rate mortgage is the only option to consider offering to clients.

But while other features of mortgages are important, such as the ability to increase payments or whether or not the mortgage is a collateral mortgage, many people have a laser-like focus on the interest rate when deciding whether to go fixed or variable.

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In a column I wrote a few years ago, I asked Professor Moshe Milevsky if the "all variable, all the time" strategy was still statistically the way to go. He has published research indicating the superiority of variable-rate mortgages over fixed from 1950 through the year 2000. He indicated that the original study's conclusions still held, but really the better question to ask is whether people are willing to pay a premium for predictability.

We've had a secular decline in interest rates for the last 30 years, and almost everyone is convinced that rates can only go up from here. Two years ago, analysts were predicting rate hikes. But that didn't materialize. Had you locked into a fixed-rate mortgage, you would've lost.

Assuming your cash flow could stomach it with no problems, is fixed as much of a slam dunk as some believe?

READERS: When is it time to bail on variable and go for fixed?

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About the Author
Personal Finance columnist

Preet Banerjee is a consultant to the financial services industry. You can follow him on twitter at  @PreetBanerjee. You can find his conflict of interest disclosure on his website. More

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