If you are looking at buying a home, there are many different kinds of mortgages to choose from. Two of the most common types of mortgages are fixed-rate and variable-rate mortgages. Many people wonder which type will work out best for them. A fixed-rate mortgage is just that, the interest rate stays the same throughout the time period of the loan. For example, you may take out a fixed-rate mortgage for 30 years. That means that your interest rate is locked in for the next 30 years and will not change until the end of the term of your loan. On a fixed-rate mortgage, there is no fluctuation with your interest rate. The periodic payments you make on the fixed-rate mortgage will stay the same for the entire life of your loan.
A variable-rate mortgage is one where the interest rate changes over time with market conditions. A variable-rate mortgage can be either a Canadian or an American style mortgage. With a Canadian style variable-rate mortgage, the interest rates are set by adding a margin to the Canadian treasury bill rate. With an American style variable-rate mortgage, there is a predetermined interest rate that fluctuates depending on market conditions. The periodic payments of a variable-rate mortgage will vary throughout the term of the loan as your interest rate changes.
Choosing between a fixed-rate and variable-rate mortgage really depends on your willingness to risk a change in interest rates. If you do not want the uncertainty of having to pay more for your mortgage as a result of moving from a fixed-rate to a variable-rate mortgage, then you should choose the fixed-rate option. If you are willing to take on the extra risk involved with choosing a variable rate over a fixed-rate, a variable rate mortgage will save you money in the long run.
You Should Know:
The term 'mortgage' comes from the law which states that somebody who lends another person money to buy a house or any other type of property is called a 'mortgagor'. The person borrowing this money is called a 'mortgagee.'
The term 'fixed-rate' refers to a mortgage where the interest rate on the loan is fixed for the life of the loan. The monthly payments remain constant throughout the life of this type of mortgage. Generally speaking, you will pay less per month by choosing a fixed-rate over a variable-rate mortgage.