Andrew Vaughey, Fixed Or Variable Rate Mortgage?

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Andrew Vaughey, Fixed Or Variable Rate Mortgage?



So you?re planning to buy a house. You might even have a home in mind.
Unless you are independently wealthy, odds are that you will have to get a
mortgage. You will want to choose a mortgage that is best for you and that
suits your needs. The first step in this process is finding a bank that is
offering you the best rates, and a banker that you can trust. Once you have
done this, you will want to consider the different types of mortgages. The
two most common types of mortgages are fixed and variable rate.

A fixed mortgage means that you buy into a mortgage at one rate (often the
current market mortgage rate, which can be about 1% below the prime rate)
and you will pay that rate until you have either paid back your mortgage, or
have decided to move. Any move with a mortgage means that you will have to
renegotiate and refinance.

A variable rate mortgage is one that changes with the interest rates as they
fluctuate. However, you generally agree to one monthly payment. Say, for
instance, that you agree to a monthly payment of $1000. Perhaps $700 of that
is going to pay the capital investment (the initial money that you owe) and
$300 is going to pay the interest. If the interest rates rise, you will
still pay $1000 each month, but only $600 will go to cover your capital, and
$400 covers the interest. This means that it will take you a longer time to
pay back your mortgage if the interest rates rise. Conversely, if you have a
variable rate mortgage and the interest rates fall, you can shorten the time
it will take you to pay back your rates. Of your monthly $1000, you could
end up paying $800 to the capital and $200 to the interest.

The difficulty with variable mortgage rates is that nobody can predict how
interest will move. In the early 2000s, mortgage rates hit an all-time low.
This meant that if you had chosen a variable rate mortgage in the 1990s, you
would have done very well and paid your house off quicker than if you had
chosen a fixed rate mortgage. However, if you chose a variable rate mortgage
in 2002, your interest rates have been steadily going up, and you are
possibly looking at the long-term financial forecast with horror. You can
refinance your loans to fix yourself into a lower rate. Ask your bank what
the penalties for refinancing are, and discuss your options with a banker.

A fixed rate mortgage offers home buyers the comfort of knowing exactly when
they will be able to pay off their mortgage. Some home buyers would prefer
to avoid the stress of having to watch the interest rates to pay off their
home.

One type of variable rate mortgage is an adjustable rate mortgage. This
might mean that your mortgage rate is calculated every year, or every six
months. Your payment plan might even hinge on the interest rates. In this
case, this means that if you have an adjustable rate mortgage and the
interest rates rise, your payments might rise as well. Talk to your banker
to see if the interest rates will affect your monthly payments.

Interest rates have been slowly but steadily increasing over 2004, 2005, and
2006. There has been a slight increase in the number of houses that go into
default recently as well. Financial analysts agree that this trend is only
going to continue for the coming years, which means that more and more
people might find it harder to pay off their mortgages. Consider your
financial situation and your future prospects. Be sure to choose the
mortgage that works best for you, both in the short term and the long term.
With a little research and planning, you will be able to make informed
financial decisions that will benefit you and possibly save you thousands of
dollars.

 Morgan James is an editor of , an information site devoted to helping
people understand how to effectively use their finances.
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