Fixed-Rate Mortgages Vs. Adjustable-Rate Mortgages: Which Is Right For You?
When you're in the market for a new home, one of the first things you'll need to consider is what kind of mortgage you want. There are two varieties of mortgages: fixed-rate and adjustable-rate. Both have their advantages and disadvantages, so it's important to understand the difference before making a decision. Mortgage calculator canada rbc is invaluable tools for helping you determine what monthly payment you can afford, as well as how much interest you'll pay over the life of the loan.
Fixed-Rate Mortgages: Pros and Cons
A fixed-rate mortgage is exactly what it sounds like; regardless of changes in market interest rates, the mortgage rate on your loan is fixed for the entire term of the mortgage. The cost of this consistency is that fixed-rate mortgages often have higher mortgage rates than adjustable-rate mortgages.
The main advantage of a fixed-rate mortgage is that it gives you peace of mind. You know exactly how much your mortgage payment will be every month, so you can budget accordingly. This predictability can be especially helpful if you're on a tight budget or if interest rates are expected to rise in the near future. It is also easier to qualify for a fixed-rate mortgage than an adjustable-rate mortgage.
The biggest drawback of a fixed-rate mortgage is that, in the event that rates decline after you receive your loan, you can pay more in interest overall. Take a 4% interest rate, 30-year fixed-rate mortgage as an illustration. Rates fall to 3% during the following few years. If you had an adjustable-rate mortgage, your payments would automatically adjust downward to take advantage of the lower rates—but with a fixed-rate mortgage, you're stuck paying 4% until you refinance.
Adjustable-Rate Mortgages: Pros and Cons
Adjustable-rate mortgages, or ARMs, are a type of mortgage that offers borrowers the option to pay a variable interest rate. On the one hand, adjustable rates can offer some key benefits such as lower monthly payments early on in the repayment process. This makes them particularly attractive to buyers with limited cash flow. Additionally, an ARM may more accurately reflect the market conditions when compared with traditional fixed-rate mortgages, giving borrowers the chance to take advantage of interest rate decreases over time.
However, ARMs also come with some important downsides. For one thing, variable interest rates can cause payments to go up unexpectedly over time if rates rise. This puts extra strain on cash flow and limits a borrower's ability to make other important financial goals like saving for retirement or contributing to an emergency fund. Additionally, because ARMs are less common than traditional loans and often considered riskier by lenders, they tend to have higher fees associated with them compared with other types of mortgages.
Which is better?
The answer to this question depends on your individual situation. Even if it means paying a higher interest rate overall, a fixed-rate mortgage may be the best option if you require the security of a fixed monthly payment. On the other hand, if you're comfortable with a little bit of uncertainty and are looking for the lowest possible payments early on in the life of your loan, an adjustable-rate mortgage could be a good option.
There's no one right answer when it comes to choosing between a fixed-rate and adjustable-rate mortgage—it all depends on your individual circumstances and financial goals. Before making a decision, it's important to talk to a lender about your options and compare offers from multiple lenders to make sure you're getting the best deal possible.