Understand Fixed and Variable Rate Mortgages
There are two types of mortgage rates: variable and fixed. Let your budgeting needs and your willingness to take investment risks help you determine which one is better for you. What is a fixed-rate mortgage? With a fixed-rate mortgage, the interest rate is set for the term of the mortgage. Your monthly payment of principal and interest will stay the same throughout the term, despite whatever rate movement, up or down, takes place. This offers you peace of mind and allows you to budget for your other priorities; you're protected if rates go up. However, you are at a disadvantage if rates go down. What is a variable-rate mortgage? A variable-rate mortgage (also known as a floating or adjustable-rate mortgage) allows for maximum flexibility when interest rates are volatile or fluctuating. This is because the rate is based on the prime lending rate and can be adjusted to reflect the economic climate.
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Variable-rate pros: A variable-rate mortgage will probably offer a lower interest rate. You also may be allowed a liberal prepayment option and the opportunity to convert to a longer term at any time. The amount of your payment is likely to remain constant, but the ratio between the interest and principal may fluctuate from month to month. This means when interest rates are on the decline, you pay less interest and more principal. If you are good at coping with uncertainty and are willing to gamble a little, a variable-rate mortgage may be the option that's right for you.
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Variable-rate cons: There is always the very real possibility that rates will rise, meaning less of your payment will go toward principal. A word of caution: Should interest rates rise dramatically, your regular payment amount may not cover any of the principal and will be used exclusively to cover interest. You may be asked to increase your monthly payment.
Which type of mortgage should I choose? Before choosing between a fixed- and variable-rate mortgage, check current interest rates. If the interest rates are high and expected to go down, a variable-rate mortgage may be better -- you will be able to benefit from the drop in rates. If you have a variable-rate and interest rates rise significantly, look into converting to a fixed-rate mortgage. You may pay a fee, but it could save you money in the long run. And if you need to budget for consistent payments and can't take the risk of fluctuating rates, look into a fixed-rate mortgage. Signing a mortgage is a big step. Knowing where rates might be headed and what kind of risk you are comfortable with should be important considerations when you decide what kind of mortgage is best for you.
N.B.: All the information provided on this site is of a general nature. It is important to consult with a local real-estate agent and/or all other specialists to ensure that the information presented here within applies in your city, region or country.
If I opt for a variable-rate mortgage, what are some features I should look for? Familiarize yourself with these features of variable-rate mortgages:
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Teaser rate: This is the initial interest rate offered by the lender, usually one to four points lower than a conventional fixed-mortgage term. This rate usually applies for only a short time before being adjusted upward. Make sure you know the difference and plan for the change. Lending institutions use these rates to get your attention, but in many cases, the lowest rates may only be offered with a closed mortgage.
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Changing rates: Look to see if the mortgage rate can be changed. Prepayment options: The lending institution will usually allow you to pay between 10 percent and 20 percent per year without penalty, with an option to convert to a longer term at any time. Look for the highest penalty-free prepayment option.
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Conversion options: Look for the ability to convert or early renew to another term without penalty. However, the fact that you can convert your mortgage doesn't mean you will be able to negotiate a better rate. Typically, the lender will not offer any rate guarantees but will only state that you can convert, at any time, to the bank's posted rate.
Every lender will have a pitch on what's offered, so be sure to do your homework and know exactly what you are getting into before signing.
N.B.: All the information provided on this site is of a general nature. It is important to consult with a local real-estate agent and/or all other specialists to ensure that the information presented here within applies in your city, region or country.