Buying a home will likely be one of the most significant purchases of your life, and you’ll usually need a loan to make it happen.
Mortgages can be a little intimidating and confusing, so here are some basic tips to help you understand how they work.
A fixed-rate is when the interest rate is set and does not change over time. The amount you pay monthly will stay the same the entire term of your loan. A fixed-rate mortgage can be a bit of a gamble, as rates may decrease, but it does provide cost certainty and making it easier to budget. However, fixed rates tend to be slightly higher to counter the effect of rates rising in the future.
A variable rate mortgage sees the interest rate change throughout the term of your mortgage – sometimes lower and sometimes higher. Financial institutions base the rate change on an index, which is usually reflective of changes in the national economy or the rate of inflation. If that index increases, so does your rate and the amount of your payment. If the index goes down, so does your rate and the amount of your payment. Therefore, a variable rate mortgage is more unpredictable and harder to budget for than a fixed-rate mortgage.
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