Is a Fixed Rate Mortgage Always Better?

The article concerns the question – Is a Fixed Rate Mortgage Always Better? The decision between a variable and a fixed rate mortgage is usually a difficult one, and it should be determined by your risk factor and your capability of tolerating an increasing mortgage payment. When choosing a variable rate mortgage, you can occasionally save money, even though the amount you save can vary depending on the current financial climate. Depending on your situation, a fixed rate mortgage may be better.

Is a Fixed Rate Mortgage Always Better

Fixed rate mortgages are those where the loan’s interest rate is predefined for a set time period, or mortgage term. This can range anywhere from 6 months on up to 25 years, with most home owners selecting a 5 or 10-year term. As years go by, more of the monthly mortgage payment goes toward the principal and less goes toward the interest. A fixed rate loan is usually better for borrowers that want a consistent monthly payment, are on a fixed budget, or are reluctant to take risks- such as a young couple whose mortgage is large in proportion to their incomes.

A variable rate mortgage has fixed monthly payments as well, but with an interest rate that fluctuates as the market does. If the rate goes down, more of the payment is applied to the principal, and when the rates go up, more is applied toward interest. Variable rate mortgages provide the homeowner with a lower rate in general, with the rate being calculated based on the prime rate less a percentage.

To decide which is better for you, you need to determine how much of a risk you can comfortably take. Will you check every day to see what the prevailing interest rate is, or will you lose sleep worrying about the interest rate’s effect on your monthly spending? If this is the case, a fixed rate loan may be a better choice for you.

However, if you can afford to take a risk and you regularly have money left at month’s end, you may be able to cope with a variable rate mortgage. Based on public studies, over the last five decades, a borrower would have been financially better off with a variable rate mortgage. According to a 15-year amortization, the borrower in question would have saved about $44,000 in interest charges on a $200,000 mortgage loan.

With a variable-rate mortgage, you will still need preapproval for a 3- or 5- year fixed rate loan. That allows lenders to determine whether you could pay your mortgage in the event of a rate increase. Variable rate loans have a historically lower interest rate, but it can fluctuate with the market. You should take time and ask yourself how much uncertainty you can handle. You should also consider whether or not you would be able to make any additional payments, such as a lump sum or an extra monthly payment. Doing that whenever you can will pay the loan off faster and reduce the total cost.

Fixed rate mortgages aren’t always better. Choosing the right mortgage is the single biggest step you take when buying a new home- you want a loan that fits your needs, your life and your budget. Do some research, talk to a mortgage broker, and learn as much as you can before you sign anything. After all, it is your life’s biggest investment!

Leave a Reply

Your email address will not be published. Required fields are marked *