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Variable Rate Mortgage vs Fixed Rate Mortgage – What’s The Difference?

variable rate mortgage vs fixed rate mortgage

Many people wonder what the best option is: variable rate mortgage vs fixed rate mortgage

One of the most important decisions a borrower will need to make when applying for a home loan is whether to apply for a variable rate mortgage vs fixed rate mortgage. As important as this decision is, many borrowers do not understand the difference between the two.

Variable Rate Mortgage vs Fixed Rate Mortgage

By taking time to learn more about these two different loan options, a borrower can make a more informed decision about which type of loan is right for him or her.

Fixed Rate Mortgage

A fixed rate mortgage is a home loan that has the same interest rate for the term of the loan. A borrower may typically select a term length of 1-5 years, and monthly payments will be required on the loan. Because the interest rate remains the same throughout the term of the loan, the monthly payment also remains the same. This type of loan allows a borrower to more easily manage his or her budget and to plan for the future.

Variable Rate Mortgage

There are different types of variable rate mortgages, but generally these are mortgages that the interest rate changes according to the Prime rate. Your payments will change in order to keep the same amortization on your mortgage. Although historically people have saved a significant amount of money choosing variable rate mortgages, they can be a bit riskier for some people because the payment fluctuates with the Prime rate. With a variable rate, you have the option to lock it into a fixed rate at anytime.

Adjustable Rate Mortgage

Adjustable rate mortgages are unique in that they are almost a hybrid blend of fixed and variable. An adjustable rate mortgage is when your monthly or biweekly payment amount remains the same, however your principal and interest portions vary according to the Prime rate.

Lower Interest Rates

The lower interest rates initially are typically associated with variable rate mortgages. The rate difference between a fixed rate and a variable rate mortgage can be significant. However, the interest rate on a variable rate mortgage may change at some point in the future. It is impossible to project what the prime rate will be at the time a rate adjusts in the future, so a borrower needs to consider the maximum monthly payment that they may be required to pay on their mortgage when applying for the loan.

When a Fixed Rate Mortgage Is Appropriate

A fixed rate mortgage offers many benefits. It provides a borrower with the ability to enjoy a steady monthly payment for the term of the loan. The risk of rate adjustments and large increases to a monthly payment are not present. A fixed rate mortgage is most appropriate for borrowers who have little flexibility in their income to account for rate adjustments or who do not foresee their budget easing up in the future.

When a Variable Rate Mortgage Is Appropriate

A variable rate mortgage may be a more affordable option initially. There are benefits associated with a variable rate mortgage, but there is also risk. If the monthly payment increases, a borrower needs to have flexibility in his or her budget to accommodate that increase.

If you’re not certain which option is best suited for you, a mortgage broker can provide monthly payment estimates for variable rate mortgage vs fixed rate mortgage. A mortgage broker can also calculate the highest possible monthly payment a borrower may be required to pay if payments increase. This information can help a borrower make a more informed decision.

What do you think? If you were getting ready to buy or refinance right now, what would you go with? Leave your comment in the box below.