Two of the most
common choices you’ll find in the mortgage market are variable rate
mortgages and fixed rate mortgages. Fixed rate mortgages are the
most traditional type of home mortgage, offering a fixed interest
rate that does not change throughout the life of your mortgage term.
There are a number of important advantages associated with this
type of mortgage.
First, if you are budget conscious,
this type of mortgage will give you the peace of mind in knowing
that your monthly mortgage amount will not change. You can budget
the remainder of your financial obligations without worrying about
a changing mortgage payment to throw things off.
A variable rate mortgage works differently.
With this type of mortgage you may be able to obtain a lower interest
rate than would normally be available with a fixed rate mortgage;
however, the interest rate is not fixed. This means that your monthly
mortgage rate may change as interest rates change. With such a mortgage
you may not be able to regularly plan your budget due to such fluctuations.
While there is usually a cap that will keep the interest rate from
fluctuating too much, even a little fluctuation can be too much
for some homeowners. Of course, there is also the possibility that
interest rates will drop and if that is the case, because your mortgage
is variable, your monthly payments will drop right along with the
interest rate.
When deciding whether a fixed rate
or variable rate mortgage is your best choice, you need to give
thought to several factors. Ask yourself whether it is more important
to be able to plan your monthly budget without wondering whether
your mortgage will fluctuate or whether you would prefer to receive
a lower interest rate in the beginning of your mortgage.
Remember that if you decide you would
like to obtain the advantages of both you do have other options
available to you. For example, you can opt for a variable rate mortgage
with a cap set – so when rates go lower your own payments fall…but
the rate can never rise beyond the cap that is set, no matter how
high interest rates may soar in the wider economy.
If you do elect to go with a
variable rate mortgage make sure you understand exactly how high
the rates may go as well as ensure you have enough ‘wiggle’ room
in your monthly budget to cushion increases if they occur. This
may help to keep you out of a tight spot and possibly losing your
home due to rising interest rates.
