Obtaining a mortgage can seem overwhelming if you don’t understand the difference between a variable and fixed mortgage.
If you’re getting ready to buy a home or refinance your current home, knowing what variable and fixed mortgages are will help you make the right decision.
A variable mortgage, also known as an adjustable-rate mortgage, is a home loan in which the interest can change over time. Typically, a variable-rate mortgage starts at a low introductory rate. Once the introductory period is over, the rate will likely increase and your payment will go up.
It’s a good idea to thoroughly discuss the terms of a variable mortgage with your lender before you sign any documents. The U.S. Consumer Financial Protection Bureau recommends asking your lender the following questions:
- How high can my interest and monthly payments go up with each adjustment?
- How frequently will my interest rate be adjusted?
- How soon can my payment go up?
- Is there a cap on how high my interest rate can go?
- Is there a limit on how low the interest rate can go?
You should also evaluate your finances and, once you have those answers from a lender, determine if you’ll still be able to afford your mortgage payment if the rate and payment reach the maximums outlined in the loan contract.
Many home buyers are attracted by the low introductory interest rate offered by a variable mortgage, and assume they’ll sell or refinance their home before the rates go up. This can work sometimes, but it’s a risky plan. Your financial situation or the value of your property could change at any moment, putting your ability to make your payments at risk.
The difference between a variable and fixed mortgage is that, unlike a variable mortgage’s changing interest rate, a fixed mortgage’s interest rate stays constant throughout the entire life of the loan.
A fixed mortgage is a much safer option for financing a home. The interest rate might be slightly higher up front, but over time the fixed rate will provide the security of knowing that your rate will never go up, and your payment will never change. Having a fixed rate mortgage protects you against any sudden jumps in interest rates.
The only downside to fixed mortgages is that, when interest rates are high, it might be more difficult to qualify for a fixed rate loan with its higher mortgage payment. This is why many people get into a variable mortgage, but over time they end up with a much higher payment than if they’d gone with a fixed mortgage in the first place.
Zech Buys Houses is Here
Are you shopping for a variable and fixed mortgage to finance a new home, but need to sell your old home first? Are you stuck in a variable mortgage with payments that have become too high? Whatever your situation, Zech Buys Houses is here to help. We buy houses in Colorado Springs and the surrounding area for cash, and can close on any day you choose. Contact us today to get your cash offer!