Differences Between Fixed and Variable Rate Mortgages

Fixed-rate and variable-rate mortgages are two different types of home loans. The primary difference between them is how the interest rate is determined and whether the rate stays the same or changes over time.

A fixed-rate mortgage is a home loan with an interest rate that remains the same throughout the life of the loan, regardless of changes in the market interest rates. This means that the monthly mortgage payment stays the same as well, making it easier for borrowers to budget their finances. Fixed-rate mortgages offer predictability and stability, making them a popular choice for homebuyers who want to lock in a low interest rate and are planning to stay in their home for a long time.

A variable-rate mortgage, also known as an adjustable-rate mortgage (ARM), is a home loan with an interest rate that can change over time based on market conditions. Typically, the interest rate is fixed for an initial period (e.g., 5 or 7 years) and then adjusts annually based on an index such as the prime rate or LIBOR. The monthly mortgage payment can fluctuate over time, which can make it harder for borrowers to budget their finances. However, variable-rate mortgages often offer a lower initial interest rate, which can make them more affordable in the short term.

When deciding between a fixed-rate and variable-rate mortgage, borrowers should consider their financial goals, budget, and risk tolerance. Fixed-rate mortgages offer certainty and stability, while variable-rate mortgages can offer lower initial interest rates and the potential for savings over the long term.