Variable vs fixed rate mortgages, Which is better?

Hey there, mortgage enthusiasts! Today, we’re diving deep into the fascinating world of variable rate versus fixed rate mortgages. Grab a cup of coffee, sit back, and get ready for a rollercoaster ride of mortgage madness.

We’re here to make the mortgage process less daunting and more exciting. So, let’s jump right in and explore the wild world of variable and fixed rate mortgages.

Variable Rate Mortgages: The Dynamic Duo

Let’s start with the variable rate mortgage, also known as the adjustable rate mortgage. It’s like that sassy friend who always keeps you on your toes. With this type of mortgage, your interest rate isn’t set in stone—it’s as changeable as a chameleon on a kaleidoscope. How does it work? Well, the interest rate dances around like a pro breakdancer, grooving to the rhythm of the prime rate. If the prime rate goes up, your interest rate follows suit, and if it takes a nosedive, your interest rate does a fancy flip too.

So, what’s the upside of choosing this variable path? Hold onto your hats, folks, because we’ve got some cool perks to share. First off, variable rate mortgages often come with lower payout penalties. That means if life throws you a curveball and you need to break the mortgage early, you won’t have to pay a jaw-dropping amount to escape its clutches. Score! Plus, historically, variable rates have been lower than their fixed rate counterparts, which means you might save some hard-earned cash on your monthly payments. And hey, if your payments are lower because it’s a variable rate, you might even qualify for a larger loan amount. Talk about an upgrade!

But wait, there’s more—here’s a little secret. With a variable rate mortgage, you can actually lock in a fixed term at any time without incurring any penalties. So, if you’re feeling the urge for a little stability in your life, you can wave your magic wand and transform that variable rate mortgage into a cozy fixed rate one. It’s like having the best of both worlds!

Now, let’s put on our skeptical hats and explore the downsides of the variable rate mortgage. Remember how we said your interest rate can go up with the prime rate? Well, that’s the catch. If the prime rate decides to throw a party on Mount Everest, your interest rate could skyrocket. And when that happens, you might find yourself having to lock in at today’s posted rates, which could be higher than what you initially signed up for. It’s a bit of a gamble, but hey, sometimes risks pay off!

Fixed Rate Mortgages: The Steady Sidekick

Alright, mortgage heroes, now let’s switch gears and talk about fixed rate mortgages—the trusty sidekick to the variable rate mortgage. If the variable rate mortgage is the sassy friend, then the fixed rate mortgage is like that dependable buddy who’s always there for you, rain or shine. With a fixed rate mortgage, your interest rate remains steady throughout the entire term, providing a sense of security and predictability that’s as comforting as a warm blanket on a chilly night.

One of the major advantages of the fixed rate mortgage is its set payments for the entire term. You know exactly how much you’ll be paying in principal and interest each month, which can help you budget and plan for the future. No surprises, no mysteries—just good old-fashioned stability. It’s like having your mortgage on autopilot!

But what about the downsides? Well, brace yourself, because we’ve got a few to discuss. First off, fixed rate mortgages typically come with higher interest rates compared to their variable rate counterparts. It’s like paying a premium for that sense of security and predictability. So, over the long run, you might end up shelling out a bit more in interest. Additionally, if you decide to break your fixed rate mortgage early, you could face higher payout penalties. That’s right—you’ll have to pay the piper if you want to escape the clutches of your fixed rate mortgage before its term is up. So, think carefully before you take the plunge!

Who Should Choose What

Now that we’ve explored the powers and pitfalls of both variable and fixed rate mortgages, it’s time to figure out who should wield which weapon.

If you’re the kind of person who loves the thrill of uncertainty, enjoys a little risk, and wants the potential to save money in the short term, then the variable rate mortgage might be your superhero alter ego. Just remember, with great power comes great responsibility. Keep an eye on that prime rate and be prepared to lock in at the prevailing fixed rates if things start to go awry. It’s like being a tightrope walker without a safety net, but hey, some people thrive on the edge!

On the other hand, if you prefer the stability of knowing exactly what your payments will be throughout the entire term, then the fixed rate mortgage could be your trusty sidekick. With a fixed rate mortgage, you can sleep soundly at night, knowing that your interest rate won’t suddenly go bananas. No surprises, no rate hikes—just steady payments and peace of mind.

Ultimately, the choice between variable and fixed rate mortgages depends on your personal circumstances and risk tolerance. There’s no one-size-fits-all solution, so take the time to assess your financial situation, consult with mortgage professionals, and consider your long-term goals. Remember, your mortgage journey is like a superhero origin story—it’s unique to you!

Conclusion: Unlocking the Mortgage Adventure

Well, dear mortgage adventurers, we’ve reached the end of our thrilling journey through the variable rate versus fixed rate mortgage battleground. We hope this wild ride has shed some light on the key differences between these two mighty options. Remember, choosing the right mortgage is like choosing your superhero identity—it should align with your strengths, preferences, and long-term goals.

If you’ve enjoyed this epic blog post and found it helpful, please show us some love by hitting the like button and subscribing to our channel. At Lendramp, we’re here to make the mortgage process as fun and painless as possible, so don’t hesitate to reach out if you have any questions or need assistance. We’re your mortgage mates, ready to guide you through the twists and turns of the mortgage adventure!

And hey, before you go, we’d love to hear from you. Leave a comment below with “variable” or “fixed” to let us know which type of mortgage you currently have. We’re always curious to see which superheroes are ruling the mortgage realm!

Pros of Variable Rate Mortgages

1. Ride the Interest Rate Rollercoaster: Variable rate mortgages offer the thrill of riding the interest rate rollercoaster. If you’re someone who enjoys a little excitement and is willing to take on some risk, this can be an exhilarating experience. You’ll be on the edge of your seat, eagerly watching the prime rate and anticipating how it will impact your mortgage payments.

2. Lower Payout Penalties: Variable rate mortgages often come with lower payout penalties. This means that if you need to break your mortgage early due to unexpected life events or changing circumstances, you won’t be hit with astronomical fees. It provides you with flexibility and the ability to adapt to changing financial needs.

3. Historically Lower Interest Rates: Variable rates have historically been lower than fixed rates. This means that, in the short term, you may be able to take advantage of lower monthly mortgage payments. This can free up some cash flow or allow you to qualify for a larger loan amount, giving you more financial flexibility.

4. Lock-In Option: One great feature of variable rate mortgages is the ability to lock in a fixed term at any time without penalties. So, if you start with a variable rate mortgage and later decide that you’d prefer the stability of a fixed rate, you can make the switch without incurring additional costs. It’s like having a “get out of variable rate free” card.

Cons of Variable Rate Mortgages

1. Fluctuating Interest Rates: The biggest drawback of variable rate mortgages is the uncertainty that comes with fluctuating interest rates. Since your rate is tied to the prime rate, if the prime rate goes up, so does your interest rate. This can lead to increased mortgage payments, which may strain your budget if you haven’t prepared for potential rate hikes.

2. Locking in at Higher Rates: If the prime rate rises significantly during the term of your variable rate mortgage, you may choose to lock in at the prevailing fixed rates to avoid further increases. However, this could mean locking in at higher rates than when you initially signed up for the mortgage. It’s like trying to catch a moving target—you might miss the sweet spot.

3. Potential Budget Uncertainty: Variable rate mortgages bring a level of uncertainty to your monthly budget. Since your payments can fluctuate, it can be challenging to plan for the long term. If your rate increases unexpectedly, you’ll need to adjust your budget accordingly, which can be stressful for some individuals who prefer stability.

4. Risk of Higher Long-Term Costs: While variable rates may be lower initially, there’s a risk that they could rise significantly over time. If rates increase consistently, you may end up paying more in interest over the long term compared to if you had chosen a fixed rate mortgage. It’s like playing a game of chance, hoping that rates will stay in your favor.

Remember, when considering a variable rate mortgage, it’s crucial to assess your risk tolerance, financial situation, and long-term goals. If you’re comfortable with potential rate fluctuations and enjoy the adventure, a variable rate mortgage might be an exciting option for you.

Pros of Fixed Rate Mortgages: 

1. Set Payments for the Entire Term: One of the most significant advantages of a fixed rate mortgage is the stability it offers. With a fixed rate, your interest rate remains the same throughout the entire term of your mortgage. This means your monthly payments will also remain constant, providing predictability and making it easier to budget and plan for the long term.

2. Know Your Total Costs: With a fixed rate mortgage, you know exactly how much you’ll be paying in principal and interest over the life of the loan. There are no surprises or sudden increases in your mortgage payments, giving you peace of mind and the ability to plan your finances accordingly.

3. Sense of Security: A fixed rate mortgage offers a sense of security and financial stability. You won’t have to worry about fluctuations in interest rates, even if the market experiences turbulence. Your mortgage payments will remain steady, allowing you to focus on other financial goals and enjoy the comfort of a consistent housing expense.

Cons of Fixed Rate Mortgages: 

1. Potentially Higher Interest Rates: One of the downsides of fixed rate mortgages is that the initial interest rates are often higher compared to variable rate mortgages. You’re paying a premium for the stability and predictability that comes with a fixed rate. While this may mean slightly higher monthly payments, it’s a trade-off for the peace of mind and security that fixed rate mortgages provide.

2. Higher Payout Penalties: If you decide to break your fixed rate mortgage early, you may face higher payout penalties compared to variable rate mortgages. These penalties can be substantial and should be considered if you anticipate the possibility of needing to break your mortgage before the end of the term.

3. Limited Flexibility: Once you commit to a fixed rate mortgage, you’re locked into that rate for the duration of the term unless you’re willing to pay a penalty to break the mortgage early. This lack of flexibility can be a drawback if you anticipate changes in your financial situation or if interest rates significantly drop during your term.

Remember, choosing between a fixed rate and a variable rate mortgage depends on your personal circumstances, risk tolerance, and financial goals. If stability, predictability, and peace of mind are your top priorities, a fixed rate mortgage might be the perfect fit for you.

And there you have it—the pros and cons of variable rate mortgages. Just like any financial decision, weigh these factors carefully, consult with mortgage professionals, and choose the mortgage that best suits your unique needs and preferences. Happy mortgage hunting!