There are two most common types of mortgages: Fixed-rate mortgages and variable or adjustable rate mortgages. They both have their strengths. Before you begin house hunting you should sit down with your mortgage broker and determine which type of mortgage is best suited to your unique financial needs and goals.
Fixed Rate Mortgage
A fixed rate mortgage features a rate that is set for the duration of the mortgage term. The mortgage’s interest rate and payments are fixed and do not change from month to month. These mortgages allow you to essentially “set it and forget it”, regardless of whether rates are currently rising or falling. Fixed rate mortgages payments are easy to integrate into your budget and offer stability.
However, these mortgages do not offer the same stability as fixed-rate mortgages. A significant increase in the prime rate can cause your monthly payment, or the interest portion of your monthly payment, to increase. This, in turn, could create a financial burden.
Variable or Adjustable Rate Mortgage
Variable rate mortgages fluctuate with the market interest rate, which is known as the “prime rate”. Payments on variable or adjustable rate mortgages either fluctuate with the prime rate, or the interest portion of each payment varies. If you look at historical rates variable or adjustable rate mortgages have proven to be less expensive than fixed-rate mortgages over time.
However, these mortgages do not offer the same stability as fixed-rate mortgages. A significant increase in the prime rate can cause your monthly payment, or the interest portion of your monthly payment, to increase. This, in turn, could create a financial burden.
Before deciding whether a fixed or variable rate mortgage is best for you it is important to discuss your options with your mortgage broker. Your mortgage broker will be able to offer you advice and guidance, and help you select the mortgage option that is best suited to your financial needs and homeownership goals.
