If you have decided to buy a house, it is highly likely you are also looking for a loan agreement to help you pay the house’s value. One of the most common types of loans for such purpose is mortgage. Mortgages come in a variety of forms, they offer different terms and conditions, but they can all be divided into two basic types: fixed-rate mortgages and variable-rate mortgages. In this article, we will deal with the differences between the two, but also with their advantages and disadvantages.
A fixed-rate mortgage
The name itself says it – with a fixed-rate mortgage, also known as a traditional mortgage, the interest rate does not change over the whole period of mortgage repayment. This means that the monthly installment of your mortgage debt will not rise over the years, no matter the market conditions and other factors that might influence the interest rate.
This type of mortgage has both advantages and disadvantages, but let us start with the advantages. First of all, since the interest rate does not change over the years, it means that the installment will always stay the same, and it makes it much easier and more secure to distribute your money and plan the financial moves. It is especially good if you plan to stay in the home you have purchased and if you have signed a mortgage agreement on long term – because it is more stabile and it is not unpredictable like variable-rate mortgages.
When it comes to disadvantages, it can happen that general rates go down, but the interest rate you pay will stay unchanged. If you wish to take advantages of lower interest rates, you have to refinance the mortgage, which includes another loan and may end up as a complicating venture and reduce your equity on the house.
A variable-rate mortgage
The term is again self-explanatory: with variable-rate mortgage (also known as adjustable-rate mortgage), the interest rate fluctuates over time in accordance with the official financial index rate. This means that the amount of monthly installments changes as time goes by, getting higher or lower than the initial payment amount.
Just like a fixed-rate mortgage, a variable-rate mortgage also has some advantages and disadvantages. On the plus side, every variable-rate mortgage offers the initial rate which remains unchanged and it is lower that the interest rate of fixed-rate mortgages. This makes it easier to manage the debt over the first several years and to save up some money. Also, if the rates go down, the same will happen with the interest rate of your mortgage, which means that the monthly installments will be smaller.
However, there are some negative sides of variable-rate mortgages as well. The first one is the shock when the initial period passes, because the monthly installments usually get higher after that period. Also, if the official rates increase, which is often the case, the same will happen with the interest rate of your mortgage and your monthly installment is going to rise.