In a fixed-rate mortgage the interest rate remains the same through the term. The interest rate is “fixed” (meaning it will not change throughout the term) and the borrower’s payment amounts remain stable throughout the duration of the term.
With a fixed-rate mortgage, the borrower is confident in knowing the amount they will pay. Fixed-rates provide borrowers with stability. Regardless of market conditions, and whether interest rates rise, the rate on a fixed-rate mortgage remains stable, at the agreed upon rate.
A long-term, fixed-rate loan will usually have a higher interest rate than a short-term, fixed-rate loan. In the end, the fixed-rate loan with the longer term will usually be more expensive. When choosing your fixed term, it is important to consider the length of time you want to lock in your rate to avoid unnecessary future prepayment penalties.
A variable-rate or adjustable-rate mortgage is a mortgage loan with an interest rate that is adjusted periodically. These adjustments are based on an index (usually referred to as the lender’s “Prime Rate”) which reflects the cost to the lender of borrowing on the credit markets.
As aresult of these adjustments, Variable Rate Mortgages are generally better-suited to borrowers who are able to withstand potantial increases in payments during the term. If the index (or Prime Rate) increases substantially in a short period of time, the borrower could experience a real financial burden.
On the other hand, a variable-rate mortgage is often considered to be advantageous because the initial interest rate is lower than a fixed-rate. However, it is important to remember that variable-rate mortgages depend on market conditions. The potential for saving money is balanced by the risk of higher costs if interest rates rise.