Is a Variable Rate Mortgage Right for You?
When buying a house, you get to decide where you want your home to be located, and what you want it to look like. You also need to decide what kind of mortgage is right for you. Under a mortgage, you make regular payments towards your loan to pay off the interest first, then the principal. Interest rates could be fixed or variable. Here’s how to decide if a variable-rate mortgage is right for you.
A Fixed-Rate Mortgage vs. A Variable-Rate Mortgage
A fixed-rate mortgage offers interest rates that are fixed for the duration of the loan term. This means that ￼your monthly payments will be fixed. This type of mortgage rate is ideal for homeowners who prefer working with a fixed budget. However, with a fixed-rate mortgage, you are tied to your interest rate for the duration of your loan term.
A variable-rate mortgage offers flexible interest rates that fluctuate according to the lender’s prime interest rate. The prime interest rate is the annual interest rate financial institutions use to determine the rates for variable loans and mortgages. With a variable mortgage, your monthly payments will remain the same even if the interest rates increase. However, an increase in interest rates will affect how much of your payments get applied to the principal.
The Advantages of a Variable-Rate Mortgage
Even with fluctuating interest rates, a variable-rate mortgage has some advantages over a fixed-rate mortgage.
1. Initial Interest rates are often lower for variable-rate mortgages.
2. You may qualify for larger loans with variable-rate mortgages.
3. If the interest rate falls during the mortgage term, a larger portion of your monthly payments will be applied to the principal.
Although initial interest rates are lower with variable-rate mortgages and could save you money in the long term, unpredictable hikes in prime rates could result in a longer repayment period.
The interest rates on variable-rate mortgages are often lower than on fixed interest-rate mortgages with the same term length, so variable-interest-rate mortgages may be attractive and save you interest in the long term. But it’s very difficult to predict which will be the lower-cost option over the term of the mortgage.
At Source Mortgage, we offer tailored mortgage solutions to meet your needs. Contact us today and we will help you determine if a variable-rate mortgage is right for you.