Fixed Vs Variable over 5 years ..which is better assuming 5 .25BPS rate drops

To compare the interest paid on a $500,000 mortgage with 20 years left on amortization under a 5-year term:

1. 4.99% Fixed Rate
2. Current Variable Rate at 6.2% with Expected Rate Drops:
   • 5 drops of 0.25% expected in Aug 2024, Jan 2025, Mar 2025, Aug 2025, and Jan 2026.

We'll calculate the total interest paid over the 5-year term for both scenarios.

Scenario 1: 4.99% Fixed Rate for 5 Years

Scenario 2: Variable Rate Starting at 6.2% with Expected Rate Drops for 5 Years

Calculation Methodology

1. Calculate Monthly Payment and Total Interest for Fixed Rate over 5 Years
2. Calculate Monthly Payment and Total Interest for Variable Rate with Expected Drops over 5 Years

Let's perform the calculations using Python.

Here are the results for the two scenarios over a 5-year term:

1. 4.99% Fixed Rate for 5 Years:

   • Total Interest Paid: $115,020.92
   • Remaining Principal after 5 Years: $417,199.88

2. Current Variable Rate Starting at 6.2% with Expected Rate Drops for 5 Years:

   • Total Interest Paid: $144,295.30
   • Remaining Principal after 5 Years: $425,890.23

Comparison

• The total interest paid over 5 years for the fixed rate mortgage is $115,020.92.
• The total interest paid over 5 years for the variable rate mortgage is $144,295.30.

The fixed rate mortgage results in lower interest payments over the 5-year term by approximately $29,274.38 compared to the variable rate mortgage with the expected rate drops. Additionally, the remaining principal is slightly lower with the fixed rate mortgage, indicating more principal has been paid down. ​​