Fixed vs. Variable Rate Mortgages — What’s the Difference?
Are you shopping around for a mortgage rate and not sure what the difference is between a fixed and variable rate mortgage? Before you buy a home, it’s important to understand what’s available and which option is best for you. To help you make a smart choice when it comes to financing your home, here’s a rundown of both fixed and variable rate mortgages and their key differences.
Variable Rate Mortgage
What Is It?
A variable rate mortgage is designed to fluctuate with current market conditions. They have fluctuating interest rates that move with the prime lending rate. In other words, if the prime lending rate trends upward, you’ll end up paying more.
It’s important to understand how your lender arranges the payments. With a fixed payment option, your payment remains the same for the entire term, but the amount paid toward the principal is determined on the interest rates. So if the interest rates go up, you’ll pay more towards the interest, and if the rates trend downwards, you’ll pay more of the principal. With an adjustable payment option, the total amount you will pay will fluctuate based on the changing interest rates. This can impact your monthly payment amount and make budgeting difficult in a rising rate environment.
Why Choose A Variable Rate Mortgage?
A variable rate mortgage often carries a lower interest rate than a fixed rate mortgage — allowing you to save initially. It’s also a great option when there are signs that the interest rates will stay low or will fall in the future. However, a variable rate mortgage carries a level of risk that is not suitable for everyone.
Fixed Rate Mortgage
What Is It?
A fixed rate mortgage is solidified. This means that over the term, your payment amount and interest rate will be locked in for the amortization period of your loan. Unlike a variable rate mortgage, a fixed rate one won’t fluctuate with the market conditions.
Why Choose a Fixed Rate Mortgage?
If you are risk-averse, a fixed rate mortgage is an excellent choice. Each and every month you will know exactly what the payment amount will be so you won’t have to worry about any unexpected fluctuating amounts.
It’s the also best option in a low-interest rate market where rates are not projected to fall any further. You get an extra layer of protection in case the market trends upwards, causing interest rates to rise. However, if there’s a significant difference in the fixed rate vs. the variable rate, then it may not be worth paying the extra amount to hold a fixed rate, especially if the interest rates are not expected to trend upward in the near term.
Understanding mortgage options is one thing, having a full grasp on all the terms is another. Don’t mortgage shop alone. Talk to a professional who can guide you in the right direction. At Geoff & Bobbie McGowan, we can help you understand all the mortgage terms and where to get financing. Learn more by contacting us today!