When you’re planning to buy a house, one of the most important decisions you should make is about your mortgage. In the situation where you decide that getting a mortgage is your best option when buying your house then the follow-up question is – fixed rate vs. variable rate mortgage? We will discuss more about this topic in this article in order to help you decide which one is most suitable for you. Most importantly, the advice of a professional mortgage broker is what you need at the time.
What is a fixed rate mortgage?
A fixed-rate mortgage charges a set interest rate that does not change throughout the lifespan of the loan. Despite the fact that the amount of principal and interest paid each month may differ from payment to payment basis, the total payment remains the same. This can give the borrower peace of mind since he already has an idea of how much to pay monthly.
Advantages of fixed rate home loans
- One of the main advantages of getting a fixed rate loan is that the borrower is protected from sudden increases in monthly mortgage payments if interest rates rise.
- It is easier to understand because all you have to remember is the amount you need to pay every month. No more complicated computations involved.
- Most of all, the fact that you already have an idea of how much to pay every month makes it easier to plan your budget and save.
Disadvantages of fixed rate home loans
- Qualifying for a loan may be difficult when interest rates are high.
- Another disadvantage of getting this mortgage loan is that, depending on the lender, it can be difficult to access for people with less than excellent credit score.
- Typically the interest rate is higher, however if the variable rate were to increase the fixed rate would remain stable so there is no risk.
What is a variable rate mortgage?
Variable rate mortgages, also known as an adjustable-rate mortgage, have interest rates that vary over time. The initial interest rate on this type of loan is set below the market rate compared to fixed-rate. However, the rate may rise or lower as time passes by.
Advantages of variable rate mortgage
- The low initial payments can be very attractive for borrowers.
- In falling interest rate environments, borrowers can enjoy lower interest rates.
- Qualifying for loans is easier with a variable rate.
Disadvantages of variable rate mortgage
- Monthly payments may change frequently and significantly.
- It can be difficult to plan your budget because of the different amount of monthly payments.
- If you take on a large loan, you may challenge your budget if interest rates rises.
Which type of loan is fit for you?
You have to consider many things when accessing a loan and getting financing. You have to consider your finances and the job you currently have. You have to ask yourself ‘how big a down payment do I need?’ Are you able to pay off your mortgage even if the interest rates rise? How large a mortgage payment can you comfortably afford?
The most popular choice among borrowers is the fixed rate mortgage since it gives them security of fixed monthly payments that they can prepare for.
How about you? Have you thought about the type of mortgage you will apply for? Make sure you weigh all the essential factors and seek guidance from trusted professionals.
Importantly when you are looking for a house in Kelowna or researching Kelowna real estate the smart approach is to get a pre-approval from a mortgage broker so you know in advance how much you can spend comfortably.
