Variable Mortgage


How do you model a variable rate mortgage?


If you have a variable rate mortgage and don't expect interest rates to rise, just enter it as a regular fixed-term mortgage.

But if you think they will rise (say from 6 percent now to 8 percent in three years, with the rate fixed at 8 percent thereafter), things are more involved. At the moment, our program doesn't handle such mortgages very well. But it's something we'll consider in a future update.

For now, here's what I recommend:

1. Enter your interest payments for the next three years as deductible special expenditures.

2. Enter your principal payments for the next three years as a non-tax related special expenditure.

3. Specify no mortgage on your current house.

4. Under assumptions, specify zero transactions costs for selling your house.

5. Specify a change in the current house in three years, and enter your existing house as the new house you'll purchase. In entering your "new house," specify the mortgage downpayment that when multiplied by your house value three years from now will equal the mortgage (measured in today's dollars) that you'll have three years from now. Also, enter 8 percent as the interest rate on the mortgage and the number of years that would be left on the mortgage as the Years of Mortgage.

6. Call me at 617 834-2148 if this is too confusing.

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