Fixed vs. Variable Rate
Choosing between taking a fixed rate or variable rate mortgage option is a decision every mortgage holder must make!
This decision requires multiple factors to be taken into consideration. Below I will outline some of the things a borrower should consider before choosing which type of mortgage term is right for them.
Historically speaking, the variable rate option has saved borrowers money during the life of their mortgage. However, depending on the lending atmosphere, it is possible that the variable interest rate is higher than a fixed rate option.
A fixed rate mortgage guarantee’s you will have the same interest rate for the length of the term you choose. A variable rate on the other hand can go up, or down during the term of your mortgage.
A fixed rate mortgage means that you will always pay the same amount of interest vs. principal during your term. A variable option on the other hand, means that the amount of principal you are paying changes continuously throughout the term of your mortgage depending on your interest rate’s fluctuation.
You should know, there are different types of variable rate mortgages, not all lender’s offer each option, but each does make a difference. The different types are;
- Adjustable Rate Mortgage
- Rate changes in line with the lender’s prime rate. This rate adjustment affects both the monthly payment amount as well as the interest rate of the loan
- Variable Rate Mortgage
- Rate of interest changes in line with the lender’s prime rate. However, the monthly payment amount does not fluctuate, just how much is being paid in interest vs. principal.
Changes Mid term
This is a big one!
If you for any reason, feel that you may have to break your mortgage mid way through your term – be it because of changes in a relationship, large expenses, changing jobs, cities, or anything else – the penalty for breaking a variable rate mortgage are almost always cheaper than breaking a fixed rate mortgage.
It is always best, if you aren’t sure how long you will remain at a residence, that you take a shorter term (1yr, 2yr, 3yr) rather than a 5yr term.
This is the most important part, what are you comfortable with? Do you like to know exactly how much you are paying in interest for the term? Are you more concerned with knowing the exact long term results? Or do you like to take the risk to potentially reap the reward of having interest rates lower and thus benefit from larger principal payments?
An additional note you should have, is that you can switch from a variable rate mortgage to a fixed rate mortgage during your term if you feel it is beneficial, however, you will not get the best rate possible, you will have a bit of a premium for switching.
At the end of the day, the only person who can make the disown is the borrower, it is a personal decision, but it is a decision that has to be made so you should be informed before making that decision.
If you are looking for mortgage advice any time – whether purchasing, renewing, or refinancing – please feel free to contact me any time.