Fixed Rate vs. Variable Rate
The decision to choose a fixed or variable rate is not always an easy one. It should depend on your tolerance for risk as well as your ability to withstand increases in mortgage payments.
YOU CAN SOMETIMES EXPECT A FINANCIAL REWARD FOR GOING WITH THE VARIABLE RATE, ALTHOUGH THE PRECISE MAGNITUDE WILL EBB AND FLOW DEPENDING ON THE ECONOMIC ENVIRONMENT.
Fixed rate mortgages often appeal to clients who want stability in their payments, manage a tight monthly budget, or are generally more conservative. For example, young couples with large mortgages relative to their income might be better off opting for the peace of mind that a fixed-rate brings.
A variable rate mortgage often allows the borrower to take advantage of lower rates – the interest rate is calculated on an ongoing basis at a lenders’ prime rate minus or plus a set percentage. For example, if the current prime mortgage rate is 2.45 percent, the holder of a prime minus 1.05% percent mortgage would pay a 1.40 percent variable interest rate.
Variables come with many strategies. One, you will almost always have a 3 month interest penalty to break the mortgage early. Another strategy would be to take the variable rate of interest and save money and use the difference in the interest savings and use those savings to pay the mortgage down faster. On average this strategy alone helps pay the mortgage down by about $8,000-$9,000.
History has shown that variable mortgage rate shoppers do better long term than fixed rate mortgage holders.
As a consumer, the best option is to have a candid discussion with your mortgage professional to ensure you have a full understanding of the risks and rewards of each type of mortgage.
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