The decision of whether to opt for a fixed rate mortgage or a variable rate mortgage can easily be answered by one question: how much risk are you willing to take?

Anyone who is new to all these terms may find it quite confusing, however, the long and short of getting the right mortgage interest program can be determined by how much variability in the interest rates you can handle. There are also secondary factors that will likely affect your decision regarding mortgage interest rates.

Let’s first begin by defining a fixed rate mortgage and a variable rate mortgage to better understand which of these programs is the better option for you.

Fixed Rate Mortgage = Stability and Security

In a fixed rate mortgage plan, your interest rate will be preset for a specific period of time known as mortgage term. A mortgage term is the duration you will be paying for the loan. It can be as short as six months to as long as 30 years. In Canada, the longest mortgage term can last up to 25 years, whereas some lenders in the US offer 30-year mortgage programs.

If you opted for a five-year mortgage term, then you will be paying a fixed interest rate for the next five years. In the beginning of the term, a good percentage of your payment go to paying off the interest, while in the latter years, the bulk of your payment will make up for the principal balance until the terms of your mortgage have been met.

A fixed rate mortgage will serve those who like the stability of having a better grasp of their finances and the security of paying a fixed amount every month, especially if the income is just enough to cover the family’s monthly expenditures.

Also, since the economy can be quite unpredictable, Windsor’s interest rates are also subject to these fluctuations. With a fixed rate mortgage, you will not have to worry about a sudden increase in your rate adjustment. Planning to stay long term at the property can also urge you to go for a fixed rate mortgage since you have no intention of leaving the property sometime in the near future.

However, be aware that with a fixed rate mortgage, you may not be saving money should the market rates change favorably for variable rate borrowers.

Variable Rate Mortgage = Increase Risk – Potentially More Savings

Should you choose a variable rate mortgage plan, you will not be paying fixed payments. For example, if you have a fully extended 30 year am, and you are currently making minimum payments, then if your rate adjusts so too will your payment. Your payments may fluctuate up or down depending on whether or not the prime interest rate moves. Prime can move up or down 8 – 10 times per year. Generally, variable interest rate mortgages are pegged with a much lower rate than those with fixed interest rates. However, as the term implies, the interest rate can change depending on whether prime rate moves.

However, a study on interest rates from 1950 to 2000 conducted by Moshe Milevsky, an associate professor of finance at York University in Toronto, surmised that: O

On average, borrowers will benefit more from a short term adjustable (prime) interest rate than a long term fixed rate loan. A borrower could have saved as much as $22,000 in interest payments on a $100,000 loan with a 15-year mortgage term while renewing at a five-year rate compared to someone who borrowed at prime and renewed annually.

A variable rate mortgage can also prove advantageous for mature couples who have a firm hold on their finances. Mature couples tend to have more stable incomes, more equity in their home and can handle the potential movement in the interest rate.

The past 30 years indicates the variable as a better option than fixed rate more then 80% of the time.

Basically to determine if you are a candidate for the variable we look at three things.

1) How well you debt service, meaning if you are at the top of the ratios and the rates go up this may cause an issue in affordability.

2) Risk tolerance – if you are not one to sleep well at night thinking about where rates can go, then the variable may not be a good for you.

3) Overall understanding of mortgages and the pros and cons of either fixed or variable.

Which Option is Better – a Fixed or a Variable Interest Rate Mortgage?

The question now then is – which of these windsor mortgage options is a better option for your specific financial situation? As mentioned, it basically comes down to the risks you are willing to take, how long you plan on staying on the property as well as how the economy is doing.

Once you have satisfactory answers to these considerations, the decision will present itself. Still, if you want an extra boost of confidence, you can always call and count on Expert-Windsor-Mortgage-Brokers to provide you with straightforward advice and valuable information to help you find the best solution.