Even though they sound complicated, fixed rate and variable rate mortgages are actually very simple. But it’s important to know the difference when you are searching the Internet or talking to brokers in order to find the best mortgage deals. With a variable rate mortgage, the rate of interest can change over a period of time and changes depend on the current market rate. The interest on a fixed rate mortgage is locked in from the start and can never change for the life of the loan. Each type of mortgage has its advantages and disadvantages. Choosing the right one for you depends on whether you are able to pay different mortgage amounts whenever the rates change.
A fixed rate mortgage is likely the best choice if you like to work with a set payment schedule. If you are flexible with paying different amounts from month to month, then you may realize some savings by agreeing to a variable rate mortgage.
Look Deeper, Dig into the Details
Either of these home loans can be a bit more complicated than they first seem. With a fixed rate mortgage, for instance, monthly payments stay the same for the life of the loan, but the payment is dispersed differently depending on how long you have been paying on the loan. Most of the monthly payment is applied to the interest during the first three years or so and only a small amount is applied to the principal.
Terms are different for a variable rate mortgage. The adjustment frequency is the interim between interest rate changes. The percent of interest you pay above the rate the market sets is called the margin. The largest interest increase that can be charged in any month is known as the cap. The ceiling is the highest interest rate that can be charged during the loan.
Choosing a Mortgage That’s Right for You
With a variable rate you can usually borrow more but do not know for sure what you will pay monthly over time. If the budget is a bit tight, then a fixed rate mortgage is the best choice.