Fixed or Variable Mortgage Rate?

There are a few basic types of mortgages. Many of these options should be discussed from an agent like Rakhi Madan in person. But here we’re going to discuss the differences between fixed and variable mortgage rates and why you might choose one type over the other.

First of all, we have to define what each type entails. With a fixed mortgage rate, you’ll be paying the same rate monthly for however long the mortgage lasts, while with a variable rate the rate will be lower for a specified number of months and then change. Depending on the size of the mortgage, you could have initial savings of over a hundred dollars a month–which over a period of sixty months, for example, would mean that you’ve paid at least $6,000 less than you would otherwise.

A variable mortgage rate can have great benefits, but it’s not perfect for everyone. If you can afford to pay the monthly amount for a fixed mortgage that’s you’re considering, you have to really consider the costs associated with the variable option. For instance, the size of your mortgage has an effect on how much you’re actually saving per month. A mortgage of $200,000 on a variable mortgage rate could save you maybe $140 per month, while comparably a $100,000 mortgage will save you $70 a month.

Are the monthly savings significant enough that you should take this option? Keep in mind that risks are involved with variable mortgage rates. This includes the fact that different versions of this mortgage type exists. With some, you will have a fixed rate for 5 years, then the rate will change on a yearly basis afterwards. Some, less common options will have rates that change less often than a year.

A related factor to consider is that after the initial period with a fixed rate ends, the new interest rate will be based on current market conditions. Your mortgage will come with terms stating by how much percentage it can increase by each year after the initial fixed rate as well as by how many percentage points in can increase by in total. A standard example is that your rate could increase by up to 2% in one year but overall the rate cannot end up over 6% higher than what you started with.

You could end up benefitting in the long run or wishing you’d taken a safer route. There’s a lot to think about, and a Toronto mortgage broker can get you on the right track.

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