Each type of mortgage product offers its own advantages and disadvantages, which should be considered when making the decision on which type of mortgage to get.
Fixed-rate mortgages provide borrowers with the stability of knowing the exact payment amount they will need to make each month. Fixed-rate mortgages allow borrowers to budget with the expectation that their monthly payments won't change over the life of the mortgage. This type of mortgage can also be beneficial for people who need to limit or manage their interest rate risk. The downside of fixed-rate mortgages is that they usually come with higher fixed-rates than variable-rate mortgages. This can result in borrowers paying more out of pocket in interest payments each month.
Variable-rate mortgages allow borrowers to take advantage of any changes to the prime lending rate. Variable-rate mortgages typically come with a lower interest rate than fixed-rate mortgages. This means that borrowers may be able to save money on interest payments during the life of the mortgage. The downside to variable-rate mortgages is that there is no guarantee that the interest rate will remain the same throughout the life of the mortgage. This means that borrowers could end up paying more in interest payments if the prime lending rate goes up over time.
Some borrowers choose to get both a fixed-rate and a variable-rate mortgage in order to protect themselves from fluctuations in the interest rates. This type of loan, also known as a blended mortgage, allows borrowers to enjoy the benefits of both types of mortgages while taking some of the risks associated with each. For example, borrowers can use the fixed-rate portion of their mortgage to provide stable payments over the long term, while using the variable-rate portion to benefit from any decreases in the prime rate.
When deciding between fixed-rate and variable-rate mortgages, borrowers should consider the potential risks and rewards of each type of mortgage and compare them against their individual financial goals. Fixed-rate mortgages provide stability and a predictable payment amount, while variable-rate mortgages provide the potential for savings. A blended mortgage can be a great option for borrowers who want to maximize their risk-reward ratio. Ultimately, borrowers should carefully research their options and make sure to select a mortgage that makes the most sense for their individual situation.
This article was contributed on Dec 09, 2023
