When considering a loan or a mortgage it is necessary to know the difference between the fixed vs variable mortgage rates. It guides you about the interest rate and the rate change during the load period, which is important. this guide, explores the understanding of fixed vs variable mortgage rates, their working, pros and cons, and a better suggestion to choose the right one.
Difference between fixed vs variable mortgage rate?
The fixed mortgage rate is popular in many states. It is the mortgage rate in which the interest rate and the amount you pay monthly remain the same throughout the mortgage term. it does not fluctuate with changes in market rates. For example, If the market interest rate is high or becoming low, it does not affect your interest rate as it is fixed.
Pros:
Fixed mortgage rate has the following pros:
- It is a source of peace of mind as the borrower does not need to worry about payment fluctuations.
- The monthly amount borrower has to pay and the interest rate remains the same throughout the term regardless of market rate changes.
- It is easy to count the total cost of borrowing.
- In this type of mortgage, you can overpay up to 10% without any penalty.
Cons:
- It is usually more expensive than the variable mortgage rate.
- It is less flexible as compared to a variable mortgage.
- Borrowers cannot get benefits in a fixed-rate mortgage if the interest rate decreases. in this case, you have to renew or refinance (including the fee) to get a lower rate.
- You can face high penalties in case of breakage of the fixed rate mortgage contract because of selling or other reasons.
How does a fixed mortgage work?
Fixed mortgage simply, means fixed. Borrower remains relaxed because the rate remains the same. The interest rate does not change whether the term is six months or one year.
What is a variable mortgage rate?
As the name indicates, your interest rate will fluctuate if there is a rise in the market rate. In variable mortgage rates, the rate does not remain the same throughout the mortgage term. Moreover, the monthly payment isn’t affected by this change but the interest rate is. However, you have some savings aside for this change.
Pros:
- It is less expensive, as you pay less interest rate if it remains the same or falls during the mortgage term.
- In variable mortgage rates, the lender allows the borrower to switch over to the fixed-rate mortgage.
- There is a benefit for the borrower with falling interest rates.
- It may become more expensive when converting to a fixed-rate mortgage.
- Without any limit, you can make a lump-sum overpayment.
- Borrowers can plan for the future because of changing rates risk.
Cons:
- It causes anxiety because it has a fear of increasing interest rates throughout the term.
Fixed vs variable mortgage
If you go with a Variable mortgage, the interest rate is based on the prime rate. There is a risk of increasing interest rates during the term. Nevertheless, a sharp increase rate does not occur commonly, it happens over a five-year term. The exact number of changes can be predicted.
Moreover, the chance of a decreasing rate is attractive. The rates may become higher than the fixed rate if the borrower wants to switch over to the fixed-rate mortgage.
Which mortgage is better?
Now you are familiar with the difference between the fixed and variable mortgage and their pros and cons. So now it is easy to choose the right option. The selection of the load depends on the following terms:
Firstly, you have to estimate your financial status, if you are not ready to face any change during the term then go for a fixed-rate mortgage.
secondly, assess your risk tolerance, if you can tolerate the changes, go for a variable mortgage rate.
Lastly, it is important to know your plans, whether your residence is permanent or temporary.
In conclusion, both the rates are not suitable for all the people. People prefer the rate type according to their needs and financial conditions. Be mined full of the risks and downsides of the policy and also the benefits. Hope so, this guide will be fruitful for you in choosing the right option. Stay in touch for such guides and share your experience in the comment section.
FAQs:
What is a five-year mortgage?
It is a fixed mortgage, decided at the start, and remains the same for five years (the most common duration is five years).
Which mortgage rate is better?
The selection of Mortgage rates vary person to person according to their needs and financial status. Consider the terms and conditions of both mortgages and then make a wise decision.
Can a borrower switch to a fixed-rate mortgage from a variable-rate mortgage?
Yes, the borrower can switch from fixed rate mortgage to variable but the drawback Is that it could be expensive.
What happens if the interest rate increases in the fixed-rate mortgage?
The increased rate does not affect fixed-rate mortgages. That’s one of the perks of the fixed-rate mortgage.
Should I fix it for 2 years or 5 years?
It depends on your needs if you want to go for a short term, go for the 2 years and vice versa.