The Difference between Fixed Rate or Variable Rate Mortgages
What is the difference between Fixed Rate or Variable Rate?
These days, mortgages are very common for home
or property loans. People tend to take them more than any other loan. Often it
is the largest loan that they will borrow. But what is a mortgage? How many
types can we find in this category? Let’s explore that in more detail. And don’t forget, we are always here to help
and assist you throughout the entire home buying process. Let's start with understanding
more about mortgages. A mortgage is a loan taken out to purchase a property. It
is secured against the actual property, so if the borrower fails to repay the
loan, the lender has the right to fore close and repossess the property. Mortgages
are typically for large sums of money over long periods, usually up to 25 years
or maybe 30 sometimes. Now, time to learn about the categories of the mortgage
in further details.
Kinds Of Mortgage
Mortgages come in various types to suit the
needs of different borrowers. Here are the 2 most common and preferred types of
mortgages: “The Fixed Rate Mortgage” and “The Adjustable Rate Mortgage (commonly
referred to as Variable Rate Mortgage).” Confusing? Our Mortgage Brokers in Red Deer can help you decide which one you
should choose and why it is the best option.
Let’s discuss them in more detail.
Fixed-Rate Mortgage:
A fixed-rate mortgage is
a loan in which the interest rate is set for the term of the loan, meaning it
will not change. This type of mortgage is desirable for many borrowers because
it provides stability and predictability. Payments remain the same throughout
the loan term, making budgeting easier. At renewal, the rate is then
renegotiated between the lender and the borrower.
Variable
Rate Mortgage:
A Variable rate mortgage is a loan in which the interest rate
can change periodically, usually in response to changes in the Bank of Canada
prime rate. The rate is often prescribed as “prime plus a percentage”. As an example, you may start off the term of
the loan at Prime + 2.00%. If Prime is
3%, then your rate would be 5% (3 + 2). This type of mortgage is attractive to certain
borrowers, as the initial rate is often lower than a fixed-rate mortgage. But
Variable Rate mortgages can be risky and volatile, as the changes in Prime rate
can go up, resulting in higher payments. Hence this kind of mortgage rate
should be for persons who can afford any changes in their rate and monthly
payments.
Differences
Between Fixed-Rate Mortgage
and Variable Rate Mortgage
Now, to understand these two types in more
detail, here are the differences you can refer to when deciding on your
preference. Apart from their basic nature, several points are very significant.
These are as follows:
Interest
Rate: While examining the side of fixed-rate mortgage’s interest, it is noted
that the interest rate remains the same throughout the life of the loan.
Whereas with a Variable-rate mortgage, the interest rate can change periodically.
Payments:
On the fixed-rate mortgage part, the payments remain the same throughout
the term of the loan. While a Variable-rate mortgage, the payments can
change depending on the prime lending interest rate.
Risk:
It is considered that fixed-rate mortgages are considered less risky than Variable-rate
mortgages because the interest rate and payments remain the same.
Meanwhile, Variable Rate mortgages can appear more attractive but are open
to volatile swings in interest rates.
Let’s Sum it Up!
We hope that the above information gives you
some insight into the differences between Fixed Rate mortgages and Variable
Rate mortgages. However, there are many other types of mortgages as well, some
with combined features and some with different options. Using a Mortgage Broker
in Red Deer will help you navigate through all of your options. We can help you determine what type of
mortgage is best suited for your long-term financial goals. And we will find you the best one, at the
best rate! You can trust the Best Rate
Mortgage Broker Team in Red Deer! Give
us a call if you have any questions! Or
if you are ready to get pre-approved for your dream home, simply complete the
online application now!
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