Toronto, Ontario (PRWEB) July 05, 2013
Homeowners in the market looking for a mortgage decide between having a variable or fixed rate mortgage. For consumers who are not on a strict budget for their mortgage payments, they can consider the merit of a variable rate mortgage says KANETIX.
A variable rate, or adjustable rate, mortgage is a type of mortgage that features an interest rate that can fluctuate during the loans term. With a variable rate mortgage, the rate of interest will change as the market interest rates fluctuate. One type of mortgage does not necessarily exclude the other, because in Canada borrowers can convert their variable rate mortgages into fixed mortgages.
A variable rate mortgage will typically allow for smaller payments. If the market interest rates go down or stay stable during the term of the loan, borrowers may end up paying less interest with a variable rate mortgage than a fixed rate mortgage. When the end of the term arrives, they may find that they have actually paid more toward the principle of the loan and less toward the interest. This may shorten the amount of time required to pay off the mortgage.
The most common risk associated with variable rate mortgages is rate fluctuation. Assuming the rate remains high, a borrower may pay more interest by the end of the mortgages term than they would have paid had they selected a fixed rate mortgage option. This also means that by the end of the mortgages term, they will have paid less on the actual principle of the loan than expectedincreasing the amount of time it will take to pay the mortgage off completely.
The risks associated with a variable rate mortgage are dependent on the lender, as well as the terms of the mortgage. Another important risk to be aware of is the fact that payments may increase on a monthly basis if interest rates raise.
When there are changes in the interest rates of a mortgage, the outcome will be dependent on the lender as well as the terms of the actual mortgage. The following scenarios are all possibilities of fluctuating mortgage rates:
Monthly payments go up and down as interest rates change
Payments will stay the same when rates go down, but will go up with rates
The payment only changes when the market rates increase to a predetermined trigger point.
Many lenders provide a convertibility feature or interest rate cap on their mortgages. These types of features will offer a degree of protection if interest rates rise. These features are only available for those who sign a new mortgage agreement.
The cap is the most, or maximum, interest amount that can be charged to a mortgageno matter the increase in the market interest rates. With these types of mortgages, the payment amount is typically based on the rate of the cap and will end up staying constant for the duration of the term.
A convertibility feature will allow a variable rate mortgage to change into a fixed interest rate mortgage at any point during the term of the loan.
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KANETIX Provides Tips on Variable Mortgages for Homeowners is a post from: Best Home Mortgage
