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19
Aug

Mortgage Rates: Fixed Vs. Variable

When you are choosing a mortgage loan, you will have to choose one that best suits your needs. Homebuyers are considered to be the majority of a mortgage broker's clientele. Although the options of mortgage loans are getting fewer in recent years as compared to a real estate boom, potential clients can rejoice when they learn that they can return to safe, reliable and sensible home financing methods. There are 3 basic types of mortgage loans and they can be fixed, variable or a hybrid. This article will cover the two common and basic loans, which would fixed and variable. Here are some scenarios on when you should consider one over the other:

Fixed-rate mortgages

As the name suggests, a fixed-rate mortgage loan charges a fixed set of interest rates that does not change throughout the entire lifespan of the loan. Although the principal amount that is to be paid each month differs from payment to payment, the total outstanding amount remains the same, which makes budgeting easier for homeowners.

•    Pros: Homeowners can basically 'set it and forget it'; regardless of whether their rates rise or fall. It offers a sense of stability and ease to manage their budgets. Individuals will also be able to know to the penny how much their monthly payments will be over the entire course of their payments.

•    Cons: Your payments will be based on high initial interest rates. Hence, you will less likely be qualified for high mortgage loans. That means some individuals will end up paying more than the others in some circumstances.

Adjustable-rate mortgages

The interest rate for an ARM can vary from time to time. An ARM's initial interest rate is usually set below the market rate as compared to their fixed rate counterparts, and then the rate rises as time goes on. After the initial term, the interest rate for this type of mortgage adjusts to reflect current market conditions.

•    Pros: The lower interest rate will help you qualify for more financing options to purchase a real estate property that could be costlier, depending on inflation, as this will be explained later on. Borrowers are also protected by caps, which help to limit the rise of interest rates on an annual basis or the lifetime of a loan.

•    Cons: ARMs are not for everyone and here are some reasons why some people do not apply for them. Firstly, the interest rate may double after a few years. This is called the First Rate Increase, and the annual caps do not apply to these increase. Secondly, refinancing options turn out to be very expensive if you plan to switch to a fixed-rate mortgage plan.

Choosing between fixed and variable

Whether it is a fixed-rate mortgage or variable-rate mortgage, they can be considered as the best choices in today's market, depending on your unique situation. You can utilize your income status, credit score, debts and other various factors to create a score sheet to see if you qualify for either. Generally speaking, when inflation rates increases, the Bank of Canada will raise the prime rate to make potential loans look more expensive. On the other hand, when inflation decreases to a lower level, the prime rate will also be lowered to stimulate economy growth and bring back the attractiveness of borrowing money. You can ponder on the spread, or difference, between ARMs and fixed-rate mortgages as the price of insurance and lending rates will not increase, more or less. When interest rates are at an all time low and are unlikely to drop any further, financial experts have given for borrowers to lock in at a fixed rate.

 

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