When it comes time to choose the type of mortgage that best suits your needs you will need to decide if you want a fixed rate, or a variable rate mortgage. Both have their own advantages and disadvantages and understanding how they work is important to make sure you end up with the mortgage that is right for you and your family.
Fixed Rate Mortgage
A fixed mortgage rate, locks in the rate of interest you pay. It will remain fixed over the life of the mortgage agreement. A mortgage term can range from 6 months to 25 years, and over time the amount from your payments that is applied directly toward the mortgage principal increases, and less is applied toward interest. You can see how it works using the FamilyLending.ca Inc. online mortgage calculator.
Variable Rate Mortgage
A variable rate mortgage (also known as a floating rate mortgage) has static payments just like a fixed rate mortgage, but there is a big difference. With a variable rate mortgage the interest rate charged will fluctuate depending on market conditions. You will win, if interest rates go down because a larger portion of your payments each month will go toward paying off the mortgage principal. If interest rates go up, your position will not be as strong because less of your monthly payment will be used to pay off the mortgage principal and more of it will be used for interest payments. You can see how a variable rate would work for you using our free online variable rate mortgage calculator.
The Bottom Line on Fixed and Variable Mortgage Rates
Variable mortgage rates usually have a lower interest rate than fixed mortgages, but this rate may go up at any time.
A fixed rate mortgage does not change over time even if market conditions change. This gives you stability and guarantees your payments will not change during your mortgage term.
So which is better?
There really isn’t a right or wrong answer to this question. It comes down to your individual needs and comfort level. If you are someone who needs stability a fixed mortgage rate may be the only thing that will allow you to sleep at night. If you don’t mind assuming some risk a variable mortgage rate might save you money.
Still not sure? Check out the FamilyLending.ca Inc. variable rate mortgage calculator, and run some numbers.
What The Experts Say
When it come to financial questions, a review of history is always helpful. A York University study of variable rate mortgages conducted in 2000 by Moshe Arye Millevsky, concluded that consumers were on average better off with a short term variable rate mortgage. The study showed that home buyers who went with floating variable rates, paid an average of $22,000 less on a $100,000 mortgage over an amortization period of 15 years, when they borrowed at prime and renewed annually.
If you still have questions even after making use of the FamilyLending.ca Inc. online mortgage calculator, feel free to call us toll-free at 1-866-941-6678 and one of our professional mortgage brokers will provide any information you need to make an informed decision.