Fixed Rate vs Variable Rate

The option of choosing between fixed rate and variable rate is always confounding for any mortgage buyer. There are a lot of differences between the fixed rate and the variable rate plans. Each has its own pros and cons too. Let’s analyze the two sides of each plan and decide which one is the suitable for you.

Fixed rate mortgages are offered with a fixed interest rate for a period of time. Under this plan, you pay a fixed monthly charge towards the mortgages. The interest of the mortgage will be paid in the initial periods and the principal will be paid in the later part of the term of the mortgage. You cannot convert a fixed rate mortgage to a different plan till you complete the term of the mortgage. The only option to revise your mortgage is to refinance it.

The fixed-rate mortgages are offered for a number of flexible periods, ranging from 6 months to 25 years. In the present market scenario when the rates are comparatively low, many buyers choose the fixed rate plans in order to avoid the plausible risks associated with the variable rate plans.

The interest rates of variable-rate mortgages are subjected to market conditions. The variable-rate mortgages are offered for higher interest rates compared to similar fixed plans at the time of purchasing the mortgage. Depending on the market conditions, it further assumes the rates. The interest rate is fixed as per the TD prime at the beginning of each month. Under this option, the buyer will pay off a fixed amount of monthly charges towards the mortgage. However, the contribution towards the principal and the interest changes in each month. For example, if in a particular month, the interest is low, the extra money paid will be added to the principal. On the other hand, if the interest rate is high, more of the payment will be added to the interest, and in turn, you will owe some extra money to the mortgage company. The variable interest option, however, is generally found to be profitable even though it offers some sort of risk to the buyer.

In both the plans, the interest rate increases as the amortization period increases. Thus a six-month plan is offered with the least interest and the 25-year plan is offered with highest interest rate.

Which plan is suitable for you?
If you like to have a peaceful life without worrying about the market conditions on a day-to-day basis, you can opt for fixed-rate plan. It is a general saying that variable-rate plans are controlled by the market and can cause great worry to a peaceful mortgage buyer. That is why many of the buyers opt for long-term fixed-rate plans. This will offer a financial stability to the buyer as the monthly payments are fixed every month.

On the other hand, if you are ready to try your luck and take a little risk with the market variation, the variable-rate mortgage can be an option for you. It is found that in the past few years, the fluctuation in the market actually helped those who had opted for the variable interest rate plans. Though it cannot be guaranteed that it will be repeated in the next few years, the chances are there that you gain a good amount in terms of the interest, if you opt for variable-interest plans. If you are able to afford high monthly payments, mortgage plans with short amortization period will help you a lot. To explain the situation with an example, a $100,000 mortgage for a 15-year fixed plan would have cost a buyer $20,000 more towards the interest even with the best deal possible than a buyer with short-term floating rate plan with a renewal policy every year for the same year and amount.

However, be watchful on the situations. The market prediction is that the variable rates are likely to increase in the coming years as a result of the rise in the property value and inflation. There is a possibility for those who opted for variable rate option to pay almost double of what they are paying at present. Many are opting for refinancing their mortgage and trying to get rid of the higher risks associated with the market rumor.