Fixed or Variable-rate Mortgage?
Filed Under (Mortgage) by admin on 27-04-2009
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“Wow!” you say to your spouse as you hit the brakes on the car. “Did you see the mortgage rate those guys are advertising?” Your worries are over, you’re thinking. Just lock in a rate like that for the next ten years, and you’ve got it made.
Not so fast. That rate may not be the one for you. Typically, the lowest available rate – and the one that makes the rate sign look great from the street – will be for a variable or adjustable-rate mortgage. That rate has the potential to be like a roller coaster. The posted variable or adjustable rate is the rate you’re getting today. Unless you have an economic ouija board, you won’t be able to predict what kind of ups and downs are ahead of you.
Let’s take a closer look. A lender will offer different rates for different types of mortgages. The rates are determined based on financial risk -to the institution and to you. When a customer is willing to take on the risk, he/she is rewarded with a lower rate. If the lender is taking on the risk (that is, the customer is promised a particular rate… regardless of what happens in the future), the rate is higher. The longer the term, the higher the risk for the financial institution.
So how do you decide? Fixed-rate mortgages, because they require a low risk tolerance, are usually better suited to first-time buyers or those who haven’t owned a home for a very long period. Ask yourself these questions: Do you like or need to know exactly what your payment is going to be over a longer period of time? Do you want to avoid the need to consistently watch rates? Do you have less than 25% down? If you answered “yes” to all, or most of these questions, a more conservative fixed-rate ontario mortgage could be the better choice for you.
A variable or adjustable-rate mortgage is best suited to people who have a flexible budget and can tolerate higher risk. Ask yourself these questions: Do you watch market conditions? Can you handle any sudden rate increases that could increase your payment? Do you have 25% or more equity in your home? If you answered “yes” to all, or most of these questions, a variable or adjustable-rate mortgage might best suit your needs.
Some lenders offer a special promotional rate for the first few months of a variable-rate mortgage, which you should discuss with your mortgage broker. Also discuss what your rate will be based on – prime minus 0.5% or 0.6% or on Bankers’ Acceptances (BAs) plus 1%. The latter being a new kind of adjustable-rate mortgage that has recently been introduced to the marketplace. Most variables or adjustables allow you to exercise an option to “lock in” a fixed rate at any time for the remaining portion of your mortgage term or for a longer term.
If the uncertainty of a floating rate is going to give you sleepless nights, you’re in good company. Many Canadians prefer the certainty of a fixed-rate mortgage. They know exactly how much they will pay over the term of their mortgage, and they can plan accordingly… with no financial surprises. But if rates do drop… and drop… and drop… you are committed to the “promise” that you have made. Your best option – have a mortgage broker help you decide which option best meets your needs.
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What is the best mortgage advertisment you have seen?I am a Mortgage Broker looking for some good ideas for advertising. What is the funiest or best mortgage ad anyone has seen? Any loan officers out there with any creative new ideas?
sub prime mess created by those hook nosed international bankers. It’s not an accident or it just happened. Either it’s by design or by incredible stupidity.
Great; very informative and well presented. Many thanks.
Its probably a good idea as long as you expect to be in the house 5 years or more. The main advantage with fixed is if interest rates go up in the future yours will not, you are locked in for the life of the loan. The main disadvantages are it will cost a few thousand (or so) to refinance and typically adjustable rate mortgages start at a little bit lower rate, though they may rise above the fixed rate – sometimes way above the fixed rate. Anyhow, if you plan to be there awhile its important to lock in the rate so your payment won't go way up sometime in the future.
You don't "lose the interest" exactly, but you simply start a new loan with new terms. If you took out the loan initially for 100K and now its down to 90K you could refinance the 90K or more (up to 90% or so of the market value of the house – less if you have owned the place under 3 years). Also you could refinance with a 15 year loan, 30 years, even 20 years for some banks. If you currently had a 30 year loan and you were 5 years into it (25 years left) and you refinanced to another 30 year fixed loan you would be adding 5 years to the life of the loan, but make a few extra payments on the thing and you can easy cut those 5 years back off.
Run, not walk, to your bank and get a 15 year fixed rate loan. With all the stimulus borrowing (UK,EU,US) crowding out cosumer loan demand, it will be a very long time before you see anything near 5% fixed.
Thanks for the vid!
Well right now rates are lower than they have been in decades so there is nothing to worry about in the short term, but honestly you are stuck. They aren't going to let you refinance unless you have like 3.5% in equity in the house (FHA) so you are just going to have to take your chances. Those are the risks with ARMs…
who knows — with the crisis we are going through who knows — you best bet is hang tough for a month and let things settle down a little and then them about getting a loan!!!
Definitely fixed rate, 30 year term. If you can comfortably afford the slightly higher payments, go for the 15 year term.
Variable rate mortgage (like interest only) is what got so many people now in foreclosure into trouble in the first place. At least with a fixed rate mortgage, you know that your payment will remain steady for years to come, with no big surprises.
Thank you for posting these videos!
a fixed rate mortgage is a loan whose interest rate will remain the same for the life of the loan, for example, if you get a fixed rate 30 year mortgage at 6%, your interest rate will remain 6% for the life of the loan
on a variable rate mortgage, your interest rate will vary depending on the guidelines for the loan, the rate will adjust according to whatever the loan is linked to and the guidelines associated with the loan
the advantages for the fixed rate is that it will always be stable for the life while the variable will change, the advantages of the variable rate is that it is usually lower than the fixed rate for the introduction period.. you can later refinance the loan once the adjusts to a higher rate
for more info on mortgage tips and latest news and commentary for a refi, check out the source
Some of the differences are due to the UK.
In the UK, getting a fixed rate mortgage involves a fee to reserve the funds. The big lenders pay tiny reservation fees but get to charge a few hundred pounds. Economies of scale and all that.
The five year max term is also a UK hangover. Apologies. Most of Europe will allow 20 year fixed rates.
As for rates, bear in mind that in the US rates are much higher and rising. In Europe, the euro causes a strange phenomenon – rates hardly ever change. By having a fixed rate in euros, past experience would be the same (almost) as a variable rate. At least over the last few years.
yes thanks for posting. it would be great if you had an email alert option on your website.