Fixed Rate Mortgage vs Variable Rate Mortgage

A home is the biggest purchase most people will ever make. However, few can afford to purchase property using cash. First time home buyers usually need to borrow money and most get that money from mortgage lenders.

What follows is an overview of the two most common mortgage types and a comparison so you can decide if a fixed rate mortgage or variable rate mortgage will best suit your needs.

What is a Fixed Rate Mortgage?

With a fixed rate mortgage, the interest rate remains the same throughout the term of your mortgage. If the interest rate is six percent the day your mortgage is approved, it will still be six percent on the day you make your last payment. Since there's never any change in the interest rate, your monthly mortgage payment never changes either.

Borrowers need never worry about interest rate fluctuations and for many, that's a relief. The stability that comes with a fixed rate mortgage makes monthly budgeting easier because you always know how much your home will cost.

What is a Variable Rate Mortgage?

With a variable rate mortgage, the amount of interest you pay changes from time to time. The interest rate can move up or down depending on the actions of the central or federal bank. When interest rates are down, variable rates are also down, which make your mortgage more affordable. But when they're up, your mortgage costs more.

Before deciding on a variable rate mortgage, be sure you'll be able to afford the monthly payments not only when interest rates are low, but also when they increase. This could be difficult if you're on a tight budget.

Fixed Rate Mortgage vs. Variable Rate Mortgage

Overall, a fixed rate mortgage is a smart bet if you're planning on being in your house for a long time.  If you're only going to be living in your house for a few years, you might as well take out a fixed rate mortgage so that you can benefit from a consistently low rate.