Sunday

The Difference Between Fixed Rate Mortgages And Variable Rate Mortgages

One of the first questions that homebuyers ask when taking out a loan is: Should I get a fixed rate mortgage or variable rate mortgage? It’s not something that should be taken lightly, because the difference between the two loans could translate into thousands of dollars over time. One is not necessarily better than the other. The one you eventually choose will depend on your personal taste, financial situation, and the prevailing economic climate.


Fixed Rate Mortgages

Fixed mortgage rates are as the name implies: fixed. The interest that is established when the loan is first taken out is the interest you will pay for the duration of the loan. This is regardless of the prime interest rate, which could be higher or lower than what you are paying on your mortgage.

Advantages: Fixed rate mortgages are a good choice for those who are seeking peace of mind when it comes to their finances. If your income is fairly stable and predictable in the near (and perhaps long-term) future, then you can afford the luxury of knowing that regardless of what happens, your rate won’t change.

Disadvantages: The major disadvantage is that you cannot take advantage of low interest rates and may very well end up paying more than you would if you had taken a variable rate mortgage.

Variable Rate Mortgages


Variable rate mortgages, on the other hand, are not fixed. The interest rates fluctuate according to economic conditions, and this could be above or below what you would be paying on a fixed mortgage. Variable rates do carry an element of risk, but they can be worthwhile if interest rates dip for a prolonged period of time.

Advantages: If interest rates are set to fall in the coming months, then you would be much better off with a variable interest rate. It is good for those who have an appetite for risk and are in a position to pay the current rate in anticipation that it will drop in the coming months. Historically, variable rates have proven to be less expensive over time, but you need to be able to see things from a long-term perspective.

Disadvantages: Rates can go up instead of down, and if you aren’t prepared for the challenges that come with this, then you could be in a difficult position.

You should go over your financial situation as well as the prevailing economic conditions with a qualified financial advisor. At Northwood Mortgage, our agents will be happy to help you make the best decisions in light of your situation.

source:  northwoodmortgage.com