How Do Variable Rate Mortgages Work?
Variable rates mortgages are mortgages where the interest rate may change during the term of the mortgage, but your monthly payment remains the same.
This means that at times you will pay more off the balance of your mortgage. Other times you may pay less, depending on the interest rate. Naturally, if the interest rate is higher more of your payment goes to interest. But if the interest rate drops you end up paying less interest and more off the principal of your mortgage.
This is not the same as an adjustable rate mortgage. The payments on adjustable rate mortgages go up and down as interest rates change. Whereas, variable rate mortgage payments are always the same amount throughout the term.
Advantages of Variable Rate Mortgage
The advantage of a variable rate mortgage is that the initial interest rate is usually lower than a standard fixed rate mortgage. It is a good option for first-time home buyers or anyone else who is on a tight budget. As the interest rate is usually lower, so are the payments which make this an affordable option. With increasing home prices, many buyers are being priced out of the market when they apply for a traditional, fixed rate mortgage.
Another advantage of variable rate mortgages is their flexibility. Buyers can often choose terms such as a lower initial payment for periods of between one month and ten years. This is especially beneficial if a buyer does not intend to stay in the home for many years. First-time home buyers may want to buy, do a few renovations, and then sell to move up into a better home.
Variable rate mortgages are more complex than their fixed-rate counterparts. So using the services of a mortgage professional is highly recommended so you fully understand the conditions and risks of this type of mortgage. There are many terms to choose from and the costs aren’t easily compared. Interest rates vary significantly by lender and it is important to know the trends in interest rates too. If a home buyer is not up on mortgage terminology, understanding the subtle and not so subtle differences between one mortgage and another is a challenge. A mortgage pro can help you sort out what it all means.
Risks of a Variable Rate Mortgage
There is a risk with a variable rate mortgage if interest rates rise rapidly. Your payments could end up being primarily for interest, but this is unlikely in our current economic conditions. The prime rate has remained extremely stable since 2006 and there are no indications this will change any time soon.
Variable rate mortgages are a powerful tool that can work well in certain situations. If you think this is something you would like to explore, you can speak to one of our mortgage professionals about your options. You do not pay a fee for their services. Also, they can discuss the pros and cons of this and other mortgage options that are right for you. There are so many lenders and products available that there is bound to be one that fits your particular situation. You have nothing to lose and everything to gain by talking to a professional.