Fixed and Variable Rate Mortgages: Which Should You Go For?
When planning to have a mortgage loan, you need to make an important decision for whether you will opt for a fixed rate or variable rate mortgage. This means that you have to be more familiar with each mortgage option or compare mortgage rates.
In the fixed rate mortgage, the total amount you paid each month in both principal payments and interest will remain the same for the entire term of the mortgage agreement. This type of mortgage allows the borrower to have predictable accounting while the buyers can experience stability and peace of mind when it comes to monthly budgeting.
As for the variable rate mortgage, the interest rate might fluctuate from month to month, which will be based on local and global economic conditions. However, this type of mortgage offers a lower interest rate.
How Does Paying A Mortgage Work?
Did you know that when you choose the right mortgage, you can save a significant amount of money throughout home ownership cycle? So, it is necessary for you to understand the payment for mortgage rates in New Zealand.
The amount you will borrow with your mortgage is called principal while interest is what your lender will charge you for lending you the money. In a typical fixed-rate mortgage, the combined principal and interest payment, the amounts will go to the principal instead of interest.
In the beginning, you will owe more interest due to the high loan balance. But over time, you will owe less interest every month as you pay down the principal and your loan balance will get lower.
If you plan to borrow a high portion of the purchase price, the lender will expect that you have more spare income. For example, if you will borrow 95%, some banks will expect to see a UMI (Uncommitted Monthly Income) of $750-$1,000 a month.
The amount you can borrow will depend on how much you can afford to repay and how much a lender can lend on a property. Lenders want to ensure that you can repay while having enough money left to live on.
Why Should You Choose Fixed Rate Mortgage?
A fixed rate mortgage is considered the most popular type of mortgage among borrowers. However, this type of mortgage also comes with cons as well as pros.
Fixed Interest Rate
The interest rate cannot increase or change over the term of the mortgage. This can provide you with certainty over the life of your loan. Thus, even the mortgage rates increase, your financial profile changes or economic factors fluctuate; the interest rate of the mortgage will remain the same.
Monthly Payment Remains the Same
Since the interest rate does not change, the monthly payment each month will also not change. A fixed rate mortgage can help you eliminate the risk in making a higher mortgage payment throughout your loan.
Flexible Mortgage Term Options
In a fixed rate mortgage, the lender usually offers terms options that will range from 10, 15, 20, 25, up to 30 years. If you choose a shorter term, you will get a lower interest rate while with a longer term, you will have a higher interest rate.
If you are looking for an ideal home financing option with low interest rate, a fixed rate mortgage is what you need. Once you’re locked with a low interest rate, you can improve your ability to qualify for the mortgage which will result in a lower monthly payment. Thus, you won’t have to worry about the increase in the interest rates in the future since you will be benefited from the lower mortgage rate.
Higher Monthly Payment
A fixed rate mortgage with a higher interest rate will result in a higher monthly payment. This is due to ensure a greater financial certainty provided by this type of mortgage option. Thus, you need to weigh the benefits of the fixed rate mortgage against the higher monthly payment cost.
Higher Interest Rate Than Other Mortgage Programs
When compared to an adjustable rate mortgage, fixed rate mortgage has a higher interest rate. If you pay a higher interest rate, you may limit the size of the mortgage you will qualify for.
Time Consuming and Costly Refinancing of Mortgage
Since the mortgage rate in the fixed rate mortgage is set and cannot be affected by fluctuations, you need to refinance your mortgage to have a lower rate if the interest rates go down. However, it is time-consuming and costly.
Biweekly Debit Charges and Registration Fees
Lenders and other private companies usually charge for this type of service. As a result, shortening the life of your loan and lowering the interest can be costly.
Why You Should Choose Variable Rate Mortgage
A variable rate mortgage is a type of loan where you can pay an interest rate on the outstanding balance according to the specific benchmark. If you are interested with this type of mortgage option, below is the list of its pros and cons.
Introductory or Teaser Rate
At the beginning of the specified period, a variable rate mortgage offers an introductory or teaser interest rate which happens to be customarily lower when compared to a fixed rate mortgage.
Easier Way to Qualify for a Mortgage
With a variable rate mortgage, homeowners can have more chances to qualify for a mortgage loan. This is due to the lower initial monthly payment.
Purchase More Expensive Home
If you are planning to opt for a more expensive home, this type of mortgage program is right for you. This is also due to a lower initial monthly payment.
More Flexible Mortgage Option
If you have fluctuating income resulted from commissions and periodic bonuses, you can benefit from the lower monthly payments offered by variable rate mortgage. That is because you can have the ability to make lump sum payments.
Payments Tend to Fluctuate
After the introductory period, the payments start to fluctuate. This means that you need to adjust with your monthly household budget since your mortgage payment may increase or decrease.
Increased Monthly Mortgage Payments
This happens when the interest rate moves up. This is where you need to pay a higher mortgage payment each month.
More Complex Option
You might find the terms of the loan confusing. Thus, you need to be familiar with significant vocabulary such as ceiling, cap, margin, adjustment index, and adjustment frequency.
Some variable-rate mortgages come with a prepayment penalty. This happens if you refinance or sell the loan. So, it is better to choose a lender offering a loan without this charge.
Which One Should You Choose?
A fixed rate mortgage is beneficial for a borrower if you do not belong to a decreasing interest environment. That is because when the interest rate starts to rise; your mortgage payment will not be affected.
A variable rate loan is a perfect choice for those people who want to pay less interest each month. On the other hand, you also need to consider the amortization period of your loan. This means that the longer amortization period your loan has, the higher the impact it can give to your monthly interest rates.
When you are deciding between fixed and variable rate mortgage, your decision will depend on your objectives. Thus, you need to consider the life stage you are in as well as your tolerance to risk.