18 Mar Fixed-Rate Vs. Variable-Rate Mortgages
When applying for a mortgage, there is always that choice of picking a mortgage package with a fixed-rate of interest or a variable-rate of interest. As a Smyrna mortgage lender, it’s a topic that can cause a bit of confusion. Both have their own benefits and downsides, so it’s important to understand how they work and which is best for your situation. We’ll start with variable-rate mortgages.
These are also referred to as adjustable-rate mortgages. With this option, you tend to get lower interest rates. However, the rates are only fixed for a set time. Once that time is up, the interest rates will change with the market. This means you could see your low rate suddenly shoot up, which also raises your monthly payments. It’s not the best choice if you are on a strict budget.
If changing monthly payments are something you are able to cover, then a variable-rate mortgage is a good choice because you can get a lower rate if interest rates drop. It’s also a good option if you know you will be moving before the set time period is up.
Variable-rate mortgages come in two options: open variable-rate mortgages and closed variable-rate mortgages.
Open Variable-Rate Mortgages
With this option, you can pay off your entire mortgage or make extra payments without being charged a penalty. You can also adjust the term time without being penalized. The payments with this option are generally fixed for the life of the mortgage. It’s a good choice for homebuyers who can make a 20% down payment, have cash flow that changes, or if they are going to be selling the home in a short period of time.
Closed Variable-Rate Mortgages
With this option, the payments are also fixed for the life of the mortgage. There are also limits on your prepayment options, so make sure you ask your lender or broker about making lump-sum payments, the amounts you can make them for and how often.
With a fixed-rate mortgage, you have more control over your budget. Rates can be a bit higher with this option, however, you have that reassurance that there won’t be any surprise rises in your monthly payments and interest rates. So, if interest rates were to rise sharply, you would still keep the lower rate you started the mortgage with. The downside is that, if rates drop, you are stuck with a higher interest rate.
Fixed-rate mortgages come in three options: open fixed-rate mortgages closed fixed-rate mortgages and convertible fixed-rate mortgages.
Open Fixed-Rate Mortgage
With the open mortgage option, you can pay off your mortgage in full or with prepayments and not incur a penalty for doing so. You are also able to change your mortgage term time to give you added flexibility, while not being penalized.
Closed Fixed-Rate Mortgage
With the closed mortgage option, you can get interest rates that are a bit lower than you would get with the open mortgage. However, there can be limits regarding prepayments.
Convertible Fixed-Rate Mortgage
With the convertible mortgage option, you can switch from an open-term mortgage to a closed-term mortgage during a specified time frame and not incur penalties. This is good for those wanting to keep their options open, however, there are limits to prepayment options.
If you aren’t sure which type of mortgage is best for you, give our Smyrna mortgage lender team a call today! We’ll find the best options for you.