When you sit down with your mortgage lender, you’ll be faced with a choice of whether to commit to a fixed or variable rate mortgage, for a variety of terms (or years). What’s the difference between the fixed and variable types, and how can you benefit?
Fixed rate mortgages can be pretty great if you lock in a really good rate to begin with. The rates you are offered will depend on your credit standing and score, but with a fixed rate mortgage you get the benefit of knowing exactly how much will be coming out of your pocket each month for your mortgage. Fixed rates are great for those who like to, or need to, budget each month. You will be guaranteed to have the same payments, month after month, for however long your term is – say four years. After this time you can renegotiate the terms of your mortgage and try to get a better rate.
The obvious downside of a fixed rate mortgage is that you don’t ever get the chance to take advantage of sudden turns in the market.
When you agree to a variable rate mortgage, you are agreeing to fluctuating payments. The disadvantage of this is obvious. When interest rates climb, so do your monthly mortgage payments, on the other hand, when rates plummet you benefit and end up paying much lower mortgage payments. In this case you are sort of at the mercy of the markets, but if you aren’t on a strict budget this could end up saving you a bundle.