The Difference Between A Fixed Rate Mortgage and A Variable Rate Mortgage

With the various options in the industry nowadays, this is probably the most confusing time for anyone who is considering getting a mortgage. Moreover, interest rates seem to be constantly fluctuating and this adds to the confusion when deciding on the best option.

Generally, there are two major types of loans. These are the fixed rate mortgage and the variable rate mortgage. Both types have their own advantages and disadvantages, which everyone should consider carefully.

A fixed rate mortgage makes the monthly payments the same throughout the term of the mortgage. Interest rates do not change regardless of increase in the industry. What was set at the very start continues until the entire loan has been paid off.

On the other hand, a variable rate mortgage paves the way for some adjustments in the interest rates. If the rates are higher now, monthly payments will be higher as well, as regulated by a certain interest index. The advantage comes in when the rates decrease at a certain period of time.

If you are after stability, fixed rate mortgages are most suitable. However, if you are willing to gamble a bit and hold on to both possible risks and rewards, variable rate mortgages may be appropriate.

The previous years have shown significant decreases in interest rates. This phenomenon has prompted a many people to choose fixed rate mortgages. In this way, they have been able to preserve such stable interest rates over a period of time.

Fixed rate mortgages may run from 6 months to 25 years, but the agreed upon interest rates are guaranteed in spite of fluctuations in the market. Security and stability are indeed not a question here so this is best for those with limited and fixed monthly incomes.

However, if you prefer a short-term option, variable rate mortgages may be best option for you. With this type, you do not have to commit to a certain interest rate for long period of time, allowing for much more flexibility.

Moreover, a variable rate mortgage gives the borrowers an opportunity to make the most out of lower rates. The interest rates are normally determined by subtracting a set percentage from a prime rate which is actually what banks usually offer only to their most credit worthy customers. This is, in fact, a source of potential savings that attracts a lot of borrowers.

Studies have shown that, although rates are fluctuating, variable rate mortgages still contribute more savings over a fixed ones. Most people are simply afraid to take risks, which is why they opt for the more stable option. However, statistics show that variable rate mortgages are more advantageous over fixed rate mortgages 88% of the time.

In addition, if you have plans for selling your home after a number of years, variable rate mortgages will work best for you where equity is easily built. You can even opt to get a balloon mortgage which starts as variable and stops at a certain point. At such period of time, you will be required to settle the remaining balance in full and payment may come from the profit generated from selling the home.

To help decide which is better for your specific situation, it is always advisable to consult an expert in this area. These experts can provide information on the movements of interest rates. They can also provide some insight on the interest rate climate which may then lead to the consideration of the option that matches well your financial situation.

Nevertheless, do not expect the process to be easy. Understanding the interest climate is not straightforward, as there may be several influences on the current market. Foreign exchange, inflation, bond and equities markets, and foreign treasury policies are just some of the major considerations that experts look into.

Indeed, both types have pros and cons. It will be up to you to evaluate these, but it is always important that you know your financial status as well as your plans for the future. Your evaluation must be as realistic as possible so that you will not end up carrying a burden that is too difficult for you to handle.


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