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Fixed-Rate vs Variable-Rate Mortgage: Pros and Cons

One of the most critical decisions when choosing a mortgage is selecting between a fixed-rate and variable-rate option. Each has its advantages and disadvantages, which we will explore in this blog.

What is a Fixed-Rate Mortgage?

A fixed-rate mortgage is a type of loan where the interest rate remains the same for the entire repayment period, which is usually between 15 to 30 years. The monthly payment and interest rate don’t change, which gives you the peace of mind of knowing exactly how much you’ll owe each month.

Pros of a Fixed-Rate Mortgage

Consistent payments: As the interest rate doesn’t change, your monthly payment remains the same throughout the life of the loan, making it easier to budget and plan your finances.

Predictable interest rate: With a fixed-rate, you know precisely how much interest you’ll be paying over the life of the loan, which makes it easier to calculate the total cost of homeownership.

Protection from rising interest rates: If the interest rates increase, you are protected as your interest rate remains the same, and your mortgage payment remains constant.

What is a Variable-Rate Mortgage?

A variable-rate mortgage, also known as an adjustable-rate mortgage, has an interest rate that fluctuates over time based on market conditions. The interest rate and monthly payment can increase or decrease over the term of the loan, depending on the prime rate fluctuations. In general, the initial interest rate of a variable-rate mortgage is often lower than a fixed-rate mortgage, but it can change at any time, which makes it more unpredictable.

Pros of a Variable-Rate Mortgage

Lower initial interest rates: A variable-rate mortgage usually has a lower interest rate than a fixed-rate for the first few years, which can save you money in the short term.

Flexible payment terms: Depending on the terms of the loan, a variable-rate mortgage may allow you to change payment amounts or make extra payments without penalty, giving you more flexibility over the life of the loan.

Cons of a Variable-Rate Mortgage

Uncertainty: As the interest rate can change based on market conditions, variable-rate mortgage payments can be unpredictable. If interest rates increase, your monthly payment will increase as well.

No protection from rising interest rates: If the interest rates increase, your monthly payment will increase as well, which can be challenging to budget for.

Potential higher lifetime cost: While the initial interest rate may be lower, the lifetime interest rate can be higher than a fixed-rate mortgage, which can cost you more in the long run.

Which One is Right for You?

The decision to choose between a fixed or variable rate mortgage depends on several factors – your budget, financial goals, and risk tolerance. If you prefer the security of a consistent monthly payment, a fixed-rate mortgage is for you. However, if you’re comfortable taking more risk to get a lower initial rate, a variable-rate mortgage might be a good option.

Both fixed and variable-rate mortgages have their advantages and disadvantages. The most important thing is to have a clear understanding of the terms of the loan and your financial goals. Talk to an experienced mortgage broker to determine which option is best for you.

If you’re ready to purchase a home or want to know more about your mortgage options, Axiom Mortgage Solutions can help. Contact us today for a consultation. Our experienced mortgage brokers will provide impartial advice and find a solution that best suits your financial needs.

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