Which is a better rate mortgage?
Should you choose a fixed-rate mortgage over a variable-rate mortgage?
It’s a question that most of us ask when we plan to apply for a mortgage. Dr. Sherry Cooper said, “it depends on the personal circumstances of each household in making this mortgage decision.” Ask yourself what kind of borrower you are. Are you ready for the unpredictability of rising interest rates, or do you want the rate where it won’t change in the meantime? Private lenders help you decide which rates are better for you.
However, there is no cost in researching beforehand these interest rates and thinking about it yourself. Let me break down to you the difference between fixed-rate mortgages and variable-rate mortgages. Then you can decide which is the better rate mortgage for you.
Let’s start with a Variable Rate Mortgage.
Variable rate changes when the interest rate rises. Your monthly payment will be in two parts. One-third goes into your interest, while the rest goes to your principal.
Your monthly payment will remain the same even when the interest rate rises. The only difference is the part that goes toward your interest rate will increase, and the amount that goes toward your principal will decrease. And vice versa when the interest rate drops.
Suppose you still need to figure out variable-rate mortgages. Pros and cons include:
Pros of VRM:
1. Home buyers can easily qualify.
– the initial monthly payment is lower than the fixed, so it’s easier to qualify, especially if you only have a small budget for a mortgage.
2. Home buyers can purchase a more expensive home.
– if you have extra money and choose a variable rate mortgage with a lower initial monthly payment, you can use that money to purchase a better home and a more expensive one.
3. Provides flexibility.
– you can make lump-sum payments in a year.
Cons of VRM:
1. Payment fluctuates
– the rise and fall of the interest rate are irregular so are your mortgage payments.
2. Interest rate increases and pay increases.
– as I’ve said, everything increases when the interest rate increases.
3. VRM is more complex
– terms of the loans and the vocabulary can be confusing.
That’s almost all the things you should know about Variable Rate mortgages. There are private lenders Ontario that will help you sort things out when you choose to have the variable mortgage. Just make sure that you choose a lender that will be a lot of help to you.
And now, let’s talk about the Fixed Rate Mortgage.
The fixed-rate mortgage remains the same even after the interest rate rises. If you prefer to avoid surprises, FRM might work well for you. You have a constant monthly payment for the entire duration of your loan. If you have set a budget and want predictable monthly payments, FRM is the one for you.
Like the Variable rate mortgage, Fixed rate mortgage also has its ups and down.
The benefits of FRM include the following:
– this is the primary benefit of this rate. You get to predict what your monthly payments will be. And you don’t need to worry about the interest rate going up any time.
2. Protection from interest hikes.
– getting a fixed rate is like getting protection from interest rises. Because as I’ve said, you do not have to worry about rising interest.
3. Monthly budgeting.
– budgeting may be easier for you when you have a regular payments for your mortgage. You don’t have to put an extra on the mortgage because you already know how much you will pay each month.
On the other hand, the downside of this rate is:
1. Miss out interest drop.
– just like how you miss the interest rise, you’ll probably miss the interest drop too. With your constant interest rate, you’ll miss out on any interest drop.
2. Early repayment charges
– fixed rate doesn’t allow you to make lump-sum payments. If you do, there would be a charge, and it’s not cheap. You may pay with all your savings when paying early repayment charges.
3. Costly arrangement fees.
– lenders tend to charge more on fixed-rate mortgages.
These are guides for you to choose a better-rate mortgage. The decision is always up to you as a home buyer. You know yourself more than anyone.
A Variable rate mortgage allows you to save money if you’re ready with a little more unpredictability and risk. On the other hand, for borrowers who don’t want to take chances on variable rates, fixed-rate mortgages assure them that their mortgage rate won’t increase in the meantime.
Dr. Sherry Cooper said, “The spread between the two is getting narrower, and so it’s not an obvious decision as it might have been a year or two ago when the variable rate loan is much lower than foxed rate loan.”
Make sure to go to a top private mortgage in Canada to get the best advice and help you choose a better rate mortgage.