Fixed vs. Variable Rate Mortgages

Mortgages what for?
Well, as I’m sure most of you have heard by now, mortgages help you buy real estate. Most of us don’t have enough cash or funds to buy a property outright hence we have to depend on others usually a financial institution to help us buy this property. With this help comes a cost and it’s called interest. The bank asks for a premium on the money that they lend you and with this premium depends on the current interest rate of the country. The two most well know types of interest rate mortgages are fixed and adjustable or variable rate mortgages.

Fixed Mortgages
Just as the name suggests, fixed mortgages lock in the market interest rate so that you will have that interest rate for the term of the mortgage. This is ideal for a time when interest rates have a chance of going higher. Why? Because if you get a fixed mortgage you won’t have to worry about paying more interest even if the government raises the interest rate.

Adjustable or Variable Rate Mortgages
If you don’t want to lock in a certain interest rate then this is for you. The Adjustable or Variable rate mortgages’ interest rate changes as the government changes it. Contrary to a fixed mortgage, if you are in a market where interest rates have a greater chance of falling than rising, then you should choose an adjustable rate mortgage.

For example, if the current interest rate is at 5.3% and although that may not be a bad rate the media and financial experts are screaming “The sky is falling! The sky is falling!” about the interest rates then you might want to go with an adjustable rate mortgage. Because if the rate falls to 4.8% then you’ll benefit from the fall unlike a fixed mortgage where you will be stuck with the 5.3% interest rate.

Mo2 Thinks
Although the adjustable rate mortgage seems to be attractive in the sense that if the interest rate falls you can benefit, you can also lose if the rate actually goes higher. In a world that isn’t efficient in many ways, although may argue otherwise, even if the general consensus is that interest rates will fall they may not and could rise higher.

If I were to buy a mortgage right now, I would take a really good look at the market. In the end you shouldn’t be depending on your banker or the media to tell you where the interest rate is going. You should be doing your own research and just have a sense as to how well your country’s economy is doing. You don’t have to know about specific numbers you just need to feel comfortable that the country is doing well or poor.

If you don’t have a concrete opinion, then guess what you should concrete that interest rate because that just means you shouldn’t take any risk with the interest rate. At the end of the day you really need to know what is good for you, and not your banker. Other things to consider are your amortization period, mortgage length, and where to borrow your money among others. I hope to write articles on these soon.

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