Choosing Between Fixed and Variable Rate Mortgages
If you’re a first-time home buyer, you will be faced will all sorts of new decisions, not just about your new home itself but also about other important factors like your mortgage. And just like choosing the perfect home, choosing the right type of mortgage is a decision that could have lasting effects on the rest of your life, so it’s important to get this decision right. One of the first questions you will be faced with in terms of mortgages is the choice between a fixed rate and a variable rate. In order to figure out which of these options is best for you, let’s take a look at both of them in closer detail.
Fixed vs. Variable: What’s the Difference?
The main difference between these two mortgage types is that, with a fixed rate mortgage, the rate of interest you pay stays the same for over the entire term. With a variable rate mortgage, on the other hand, the rate of interest you pay will fluctuate based on current interest rates. With a fixed rate mortgage, you will be making the exact same payments each term. Also, with this type of plan you will know that the amount of your payment that goes towards your principle – and the amount that covers interest – will also be the same for each term. With a variable rate plan, on the other hand, your payments can change from term-to-term in one of two ways: either your mortgage payment itself will fluctuate, or the ratio of prime to interest will vary. For both of these types of mortgages, there are advantages and disadvantages. The choice you make ultimately depends on what type of person you are and how you prefer to manage your money.
The Pros and Cons Of Fixed Rates
Fixed rates are a great choice if you are the type of person who enjoys stability and prefers to plan their finances far in advance. With a fixed rate mortgage, you know how much you will be paying each term, and you know exactly how long it will take you to pay your mortgage off. The disadvantage of this approach is that you could potentially be missing out on some of the savings that variable rates offer. Essentially, with a fixed rate you are paying a premium to ensure the stability of your payments. If the market changes over time in a way that is favorable to borrowers, then you will miss out on these benefits.
The Pros and Cons Of Variable Rates
The real advantage of variable rates is that historically, variable rate mortgages have proven to be, on average, more cost-effective than fixed rates. But, just because this has been historically true for most people doesn’t mean that it will be true with you. With a variable rate you are subject to market fluctuations, so if interest rates experience a net rise over the course of your mortgage term, you will be more financially burdened than someone with a fixed rate plan.
Ultimately, the question you have to ask yourself in this scenario is: can you handle risk? Given the uncertainty of today’s market, many people will opt for a fixed rate plan. However, if you’re the type of person who keeps a keen eye on the market and isn’t afraid to take financial risks, you could potentially end up with major savings by choosing the variable rate option.