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Your Money – Finance Column – Fixed Versus Variable Rate Mortgage

There are various mortgages available in the loan market today. The various forms of mortgages are fixed rate mortgage, graduated payment mortgage, variable rate mortgage, interest only mortgage, adjustable rate mortgage, negative amortization mortgage, and balloon payment mortgage. Of these fixed and variable rate mortgages are very popular.

A fixed rate mortgage (FRM) is a mortgage where the rate of interest remains the same throughout the term of the loan. A variable rate mortgage is a form of mortgage wherein the rate of interest varies or is adjusted. Though the variable rate mortgage may have payment term that is fixed, the interest rate can change. The rate is determined by prevailing market conditions.

Fixed rate mortgages have rigid conditions though new products are available which are popular. A fixed rate mortgage can be good if one wants to carefully budget repayment. Here you know exactly how much you need to repay which means payment can be planed accordingly which can give you a degree of security and certainty.

A fixed rate mortgage is

1. Predictable and secure. The borrower is not exposed to increasing interest rates due to market condition or due to any other reason.

2. Higher cost in short term: The interest rate charged for a fixed rate mortgage is generally higher than the initial interest rate for a variable rate mortgage.

3. Ideal for long-term ownership: In the long term, the rate of interest on a variable rate mortgage can exceed that of a fixed rate mortgage.

Variable rate mortgages generally provide flexibility and options, but they can be highly risky in a rising interest rate market in case your have overcapitalized on your loan. The important aspect while availing a variable rate mortgage is to plan and budget for increase in interest rates and also make sure that it is possible for you to meet your repayment obligations in case rates rise.

A variable rate mortgage is

1. Good for short-term ownership: If you plan to sell your house before the adjustable rate comes into force then you can benefit from lower initial fixed rate.

2. Good when market rates fall: If you are confident that the index can go down in the near future, then you can pay low interest rates in the future.

Most experts suggest fixed rate mortgage as better option in case there is likelihood of interest rate rise in the medium to long term. But benefits gained might not be enough to cover the fees to be paid to switch from a variable to a fixed rate mortgage. The important point is to check your own financial situation and then consider a change.

It is pointed out by experts that the fixed rates never fall below the standard variable rate for a long period of time. In case fixed rates do fall, then it is good idea to fix at least some part of the mortgage.

The type of mortgage which suits you wholly and solely depends on your ability to handle the rate of interest fluctuations.

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