Fixed And Variable Mortgage Rates

When you're ready for a mortgage you'll have to decide whether to go variable or fixed. With a fixed rate mortgage your interest rate and monthly payment will stay the same across your term. With a variable rate on the other hand your interest rate and monthly payments are likely to fluctuate over the course of your term. We brought you both types of rates and show you the differences in more detail.

In variable rate mortgage will start with a lender's prime rate the lender will either offer you a premium or a discount to their primary. In this illustration your lender has offered you a variable rate mortgage at a discount. Important points to consider our that your relationship with Prime never changes throughout the term and that Prime can change based upon the bank overnight lending rate. Let’s say you've just purchased a home for 300,000 and have a five percent down payment. In this example with a five-year fixed interest rate a 2.93 percent you would have a monthly mortgage payment of 1375 dollars. With a variable rate mortgage with an effective interest rate at 2.55 percent you would have a monthly mortgage payment of 1319 dollars. In this example the variable rate mortgage payment is less.

However you must consider that your payment can fluctuate throughout the length of the term. Two years into your term Prime has increased to four percent what that means is the effective interest rate of your variable rate mortgage has increased the 3.5 five percent. That also means that your effective monthly mortgage payment has increased the 1470 dollars. Now let's look at how much these interest rates would cost you over a five-year term.

Since fixed interest rates remain the same over five years. We simply multiply the payment x 60 months that would give you an effective mortgage payment over five years of 2500 dollars. For the variable rate we must calculate the payments for the first two years when the rate was 2.5 five percent and then calculate the payments for the last three years when the rate was 3.5% the payment for the first two years is 1656 dollars and the payment for the last three years was 2920 dollars. For a total of eighty 4576 dollars in this example payments for the five-year fixed are lower than the five-year variable rate. However that is not always the case while sixty percent of people prefer the stability of a fixed interest rate while variable interest rates have been lower over the past 10 years.

A fixed-rate provide stability and eases budget anxiety. Because it is constant over the duration of the term. However when the fixed rate is significantly higher the stability is often not worth the premium. That’s all for today, check out extramortgage for more information about mortgage.