Fixed-Rate Mortgage Versus Variable-Rate Mortgage: Which Is Best for You?
Do you have difficulty deciding which type of mortgage to choose whether fixed rate or variable rate? Before you make a decision, you have to learn about the differences between fixed-rate and variable-rate mortgage. More importantly, you have to do a profiling of your current and, to the extent, future financial situation in order for you to see which type is best for you.
A fixed-rate mortgage is one where the total amount of monthly payment remains the same throughout the duration of the loan. The amount of principal and interest to be paid varies but the sum should be the same. With this type, budgeting is made easy because the amount is predetermined. However, when the interest rate is high, getting your loan approved may be difficult because the monthly payments become less affordable. But since the payment is fixed, you are shielded from market fluctuations that can significantly increase your monthly payments if interest rate goes up.
A variable mortgage is one where the interest rate varies; hence the monthly payment may rise or fall depending on the market condition. In this type of mortgage, the initial interest is lower than the market rate. There is a period where the initial interest rate remains the same. But after this period, the interest rate will be allowed to float. The shorter this period, the lower the initial interest rate you get upon approval.
So which one is best for you?
To answer this, you need to profile yourself. Ask several questions related to the following topics.
Does the initial payment matters a lot? If you are aiming for lower initial monthly payments, the variable mortgage may be more appropriate for you. This is because the initial interest rate in the variable one is set below the market rate.
How much loan can you afford to pay? Will you be able to take on some increases in the monthly payments should the interest rate increase? With a lower loan amount, you may be able to afford sudden changes and so the variable mortgage may be right for you. But if you are aiming for a huge loan amount, take note that any increases in the interest will also increase your monthly payment significantly. If you think your earning capacity cannot take on such a big risk, you should go for a fixed-rate mortgage.
Your Duration of Stay in the Property
Do you intend to live in the property for only a given time? If so, then you may get a variable mortgage. But if you are eyeing on a property where you intend to stay for good, then you would want more stability in your payments.
Research about the prevailing market condition and the direction where the interest rates will most likely take. In an environment where the interest rate is likely to go down, the variable mortgage is the more appropriate choice. But if you suspect that interest rates are on an upward direction, choose the fixed-rate mortgage so you can be protected from sudden market fluctuations and economic uncertainties.
To know which type of mortgage is most fitting for you when buying a home, you have to evaluate your needs and capacity as a borrower. The points laid out in this article are merely descriptive of the two types. The scenario may be different with varying loan terms. Whatever you choose, make sure that it suits both your current situation and future earning capacity.