How Do You Decide Between a Fixed Rate and a Variable Rate Mortgage?

 

What is the Deciding Factor?

Many people think that the main thing to consider when deciding between a fixed rate and a variable rate home mortgage is whether they believe interest rates will fall or rise. If they believe interest rates will increase, they will opt for a fix rate mortgage. Conversely, if they believe that interest rates will continue to decline, they will opt for a variable interest rate home loan. Unfortunately, interest rates are unpredictable. There is no economist or financier that can give you a 100 percent guarantee on what interest rates will do in the next year, much less than the next 30 years.

Fixed Rates

Most home buyers who choose a fixed interest rate do so because of payment stability. With a fixed rate loan, the payments will remain the same over the life of a loan. This means you will know exactly what you will be paying each month. The term of a fixed rate can vary from mortgage to mortgage. Some fixed rate loans are for a period as short as 12 months. Other loans remain fixed for 10 or 15-years.

Shorter-term fixed rates (6 to 12 months) often offer rates that are substantially lower than other mortgage interest rates. It should be noted after this short term, the interest rate will revert to a high rate.

Fixed rate mortgages offer limited flexibility and can have prepayment penalties.

Variable Rate Mortgage Loans

The payment of a variable loan will fluctuate, depending on the interest rate. The interest rate on a mortgage normally mirrors that of the Reserve Bank. Many variable rate loans offer a number of benefits, including no prepayment penalties, the ability to pay extra payments towards the principle at any time and much more. One reason that home buyers choose a variable interest rate is to keep payments low and allow for early payoffs. This is especially beneficial to those who plan to sell their home in the next couple of years.

Variable loans often feature lower fees and a lender may offer a package deal on the mortgage compared to a standard fixed loan. This means the buyer may have discounted fees or a lower down payment.

Which Loan Should You Choose?

When comparing the different types of loans, you need to compare loans with similar features. Instead of looking at the interest rates only, you need to look at the best loan based on your unique circumstances. Once you have determined the best type of loan, you should look at the different interest rates. Using this method will ensure that you are not being charged for features that you do not need.

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