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Fixed vs Variable Rate Mortgage: Which is Best for You?

Fixed and Variable Rates

Mortgage shoppers often come across two different types of mortgage rates, fixed or variable. But do you know what they mean!?! A lot can depend on your needs when deciding which type is right for you - so Keep reading to take a closer look at each one in more detail.

A fixed rate mortgage is just what it sounds like—a mortgage with a fixed interest rate for the term of the loan. This means that your monthly payments will not go up (or down) with the changing rates in the market. That can be a big plus for budget-minded homeowners who want to know exactly how much their mortgage payment will be every month. A downside to this is if you have to break your term early. The penalties and fees very and can sometimes be $10,000 or more. If you do not plan on staying in the home for a five year term but want a fixed payment make sure you look at a shorter term like 1-3 years. You may have a slightly higher interest rate but it can potentially save you thousands in penalties.

On the other hand, a variable rate mortgage has an interest rate that can fluctuate over time. That means your monthly payments could go up or down depending on market conditions. Some homeowners like this type of mortgage because it often starts out with a lower interest rate than a fixed rate mortgage. However, it's important to remember that interest rates could rise at any time, which could make your monthly payments unaffordable. If you are considering a variable rate it's a good idea to test your budget at 2-3% higher then your contract rate. If your budget allows for a rise in rates then this is a great option. Another bonus with variable is penalties which are usually smaller vs the fixed rate penalties for breaking the term early.

There are 2 types of Variable options depending on your lender;

ARM (adjustable rate mortgage)- This type of variable payment means as the prime rate rises or falls so to will your payments. The risk here is not having the budget if the rate rise significantly, your payments could go up and up.

VRM (Variable rate mortgage)- This type is usually a static payment and offered by some of the big banks. What this means is your payment stays the same even if the rates rise or fall, making it great for those who want to know exactly what their payments will be consistently. How this works as a variable you ask.... the variable part is how much of that static payment is paying interest and how much is going towards the principle. If the rates rise then more of your payment goes to interest and less to the principle. The risk here (as we have seen this year), is that the rates could rise quickly and high putting you in a trigger rate situation. When this happens it means your payment is not enough to cover the interest and nothing is going to principle. You may be required to make a lump sum payment or up your payments.

So, which type of mortgage is best for you? It depends on your individual circumstances and financial goals. If you want the stability of a fixed monthly payment, a fixed rate mortgage might be the way to go. On the other hand, if you're comfortable with a bit of risk and you're hoping to get a lower interest rate, a variable rate mortgage might make more sense. Ultimately, it's important to work with a qualified mortgage professional who can help you understand all of your options and choose the best type of mortgage for your unique situation.

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