The decision to buy a home is one of life’s biggest financial decisions. One of the most critical pieces of the puzzle is deciding which type of mortgage is right for you. Two of the most popular types of mortgages are fixed rate mortgages and variable rate mortgages. Here is a breakdown of the differences between the two, to help you make an informed decision.
Fixed-Rate Mortgage:
A fixed-rate mortgage is one of the most predictable types of mortgage products. With a fixed-rate mortgage, the interest rate remains the same throughout the term of the loan. This means that your monthly payments will also remain the same. The term of a fixed-rate mortgage varies, with 10, 15, 20, or 30 years being the most popular choices.
The biggest advantage of a fixed-rate mortgage is that borrowers know exactly how much they’ll have to pay each month, which makes budgeting simpler. Plus, fixed-rate mortgages appeal to consumers who value predictability and stability when it comes to their finances. However, keep in mind that with a fixed-rate mortgage, the interest rate you pay will be slightly higher.
Variable-Rate Mortgage:
A variable-rate mortgage, as the name suggests, comes with a fluctuating interest rate. This means that your mortgage rate can change over time. If interest rates rise, your mortgage payment will increase, which can make budgeting more challenging. On the other hand, if interest rates drop, so will your mortgage payment.
In addition to the possibility of a lower interest rate, the biggest advantage of a variable-rate mortgage is that they typically come with a lower rate than fixed-rate mortgages. This means that variable-rate mortgages tend to be more attractive to borrowers who want to save money on interest.
Ultimately, when choosing between a fixed-rate mortgage and a variable-rate mortgage, borrowers need to evaluate their personal preferences, risk tolerance, and financial situation. Keep in mind that every home buyer is different, so what works for one may not work for another.
To sum up, fixed-rate mortgages offer certainty and stability while variable-rate mortgages offer lower rates with the potential for savings. Carefully weigh the pros and cons of each option, and take your unique situation into account before making a decision.
