Fixed Rate Versus Variable Rate
Applying for a mortgage can be a difficult process. Deciphering all the loan jargon certainly isn’t easy.
Variable- and fixed-rate mortgages are two of the most commonly talked about options for most prospective homebuyers. But what do they actually mean? And, when it comes to fixed rate versus variable rate, which is better? While your mortgage broker can help you understand these differences clearly, we’re going to offer an overview to get you started.
What Are Fixed and Variable Mortgage Rates?
Before we go any further, it is important to understand the distinction between these two options. Both offer positives and negatives depending on your individual situation.
- Fixed Rate – Fixed-rate mortgages have a set interest rate for the duration of the loan period. So, an interest rate of 3.1% at the time of the deal will remain the same until the end of the amortization period. The monthly payment can fluctuate from payment to payment, but you will be paying the same total amount of money no matter what.
- Variable Rate – Variable-rate mortgages, on the other hand, vary with the standard market interest rate (also known as the prime rate). If the prime rate goes up, then the interest rate on these loans will be adjusted upward. If the prime rate goes down, then the opposite adjustment will occur.
It should also be noted that there is a period during which a variable-rate mortgage is actually fixed. This can be as short as 1 month and as long as 10 years. This is to protect consumers from sudden shifts in the market rate.
Which Mortgage Rate is More Popular?
People opt for fixed mortgage rates about 66% of the time while variable rates are chosen 29% of the time. This doesn’t necessarily mean that fixed mortgage rates are better, however.
Homebuyers often choose this option because they believe it is predictable, and they don’t have to worry about interest rates skyrocketing. Even so, with variable mortgage rates, homebuyers can go long periods of time with a much lower interest rate than their fixed-rate counterparts.
So, if you’ve asked yourself, “What type of mortgage rate should I choose?” there’s really no definitive answer.
Fixed Rate versus Variable Rate
Again, if this were a boxing match, it would end in a draw. Fixed mortgage rates are not inherently better than variable mortgage rates and vice versa. It really depends on your personal preference and the amount of money you have. Fixed rates can provide you with:
- Stability (knowing exactly how much you’ll pay for the duration of the loan)
- Less risk (you don’t have to worry about an uptick in interest rates)
- No flexibility (you can’t take advantage of lower interest rates)
You should almost always opt for a fixed mortgage rate if the market rate is low and is not expected to dip any lower. But, if the market rate is high, you could be stuck with a high-interest mortgage.
Variable rates, by contrast, offer consumers:
- More potential reward (downward trends during the variable rate term reduce the total amount)
- Flexibility (the interest rate is dictated by the market conditions)
- More risk (market conditions could spike)
It’s best to use variable mortgage rates when the prime rate is high and is expected to fall. But you should only choose variable rates if you can handle periodically higher payments.
If you go into a variable mortgage rate thinking that it’s going to provide you with a swift and consistent downward trend, then you’ll likely be disappointed. Fluctuations are natural, and sometimes the monthly payments may be higher (even if the total amount of the loan might end up being lower).
In any event, it’s always best to speak with a mortgage broker to figure out which of these options is right for you.
What you should do now
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