If you’re looking to buy a house either for personal use or for use as an income property, you may be considering the two different types of mortgages—variable and fixed rate. Before making a decision, Jason Hartman recommends exploring your options and becoming educated. We’re here to offer a few considerations that may do just that.
Variable Rate Mortgage
A VRM is one in which the interest rate changes every month, typically on the first day of the month. The monthly payments remain the same, but interest rate changes affect how exactly the payment is applied to the mortgage. Interest rates change based on the particular bank’s mortgage prime rate, and interest is compounded monthly.
Fixed Rate Mortgage
A FRM is a mortgage in which the interest remains the same for a set period of time. During the mortgage term, the borrower’s payments will remain constant, and interest is compounded semiannually.
Historically, variable rate mortgages have been a better choice for homeowners. Now, fixed rate mortgages tend to offer slightly better deals because lending rates rise. Variable rate mortgages offer initial savings, however. Variable rate mortgages offer the borrower the opportunity to switch kinds of mortgages as well.
Choosing a type of mortgage is difficult because there are so many additional factors—type, term length, and so on. The type of mortgage that is best for you depends so much upon your specific situation. Think about the lowest possible cumulative mortgage rate over the length of time you own a property—until it is entirely paid off.
As a general rule, you might select a fixed rate mortgage and expect better results if we are entering a period in which rates will likely increase during most of the term and if the difference in rates is small. If rates are expected to increase during the term and the rate difference is significant, you’ll probably get a lower average rate with a variable rate mortgage. If rates are declining or if they’ve been sustained, a variable rate mortgage will probably offer the lowest average rate. When the rate is lower than that of a fixed rate mortgage, this is especially true. (photo credit: SalFalko via photopin cc)