FIXED OR VARIABLE MORTGAGE INTEREST RATE?

Fixed vs. Variable Interest Rate?. Whether you are ready to purchase your first home or looking to refinance your current mortgage, it is important to understand all the options available to you. Most banks and mortgage lenders will offer you a choice between a fixed rate and a variable rate mortgage loan.

Before making a decision you should fully understand the difference between the two, and consider the impact it will have on your monthly mortgage payments and the "interest to principle" ratio. The interest to principle ratio is how much of your mortgage payment is going towards the paying the interest on your loan vs. how much is paying off mortgage principle. The more payments you make on the principle, the sooner you will be mortgage free!

With a fixed rate mortgage, you lock into a set interest rate for a pre-determined term. It is common for banks to offer a fixed interest rate for the first 5 years, though it is possible to get a fixed rate for the full mortgage term. The benefit of having a fixed rate mortgage is that you will always make the same payments for the predetermined term, regardless if interest rates rise. However, if interest rates fall you continue to pay at the higher “fixed” rate.

Variable rate mortgages are always adjusting based on current (market) interest rates. Lenders try to keep your mortgage payment the same each month. However, when interest rates rise you pay less towards the principle sum borrowed. If market interest rates rise sharply, a majority of your monthly payment may be going toward interest. In extreme cases you could end up paying more than the standard monthly payment - all as interest!

Whether you choose a fixed or variable rate home mortgage loan boils down to your aversion to risk and market conditions. By examining market trends you can get an idea of what to expect for the coming years. And while no one can predict the future it does allow you to make a more informed decision. If the trend suggests interest rates are going up, it normally makes sense to lock into a fixed interest rate. If interest rates are currently high but appear to be going down, then a variable rate may work better for you. Even though you may pay a higher interest rate at the beginning, as interest rates fall you start to pay more towards the mortgage principle.

Most new (first time) home owners try to lock into a fixed rate as they can stick to a budget and avoid unexpected expenditures (surprises). Those who are refinancing or "purchasing for investment" can benefit from the fluctuations with a variable rate mortgage loan. Either way, make sure you know the facts, and make an informed mortgage choice.