Many people have heard about the foreclosures that have been devastating thousands of homeowners around the country. This has become huge news that has affected both homebuyers and homeowners across the country. To avoid foreclosure, it is very important that a homebuyer, whether purchasing their first or tenth home, is informed of the type of mortgage and its financial implications.  There are benefits to having a fixed rate mortgage, but there are also benefits to having a variable interest rate mortgage. It is up to you to decide which type of mortgage works best with your financial situation.

A fixed interest rate mortgage

A fixed interest rate mortgage is a type of mortgage in which the interest rate does not fluctuate. With a fixed rate, the homeowner is locked into the current interest rate of the market.  Therefore, if the interest rate is 6% at mortgage signing, then the homeowner is locked into a set amount for the monthly payment. If your monthly payment is $1,050, this is the amount that you will pay each month, regardless of the fluctuations in the market. Now, this figure does increase when homeowner’s insurance premiums and taxes increase.

The number one benefit to having a fixed interest rate mortgage is that the borrower is not affected by sudden increases in interest rates. A fixed interest rate mortgage does not vary much from one lender to another, and it is often very easy to understand. This is the perfect mortgage for someone who does not have much flexibility in their monthly budget and needs to know exactly what their monthly mortgage payment is each month. Remember, if interest rates drop dramatically, you can always refinance.

A variable interest rate mortgage

A variable interest rate mortgage is one which the interest fluctuates with the ups and downs of the market. For example, if the market interest rate is 8% at the time of your mortgage signing, then this is the interest rate that is used to determine your monthly mortgage payment. If interest rates in general drop, the interest rate that is used to calculate your monthly repayment is adjusted to the market rate. Conversely, however, a significant increase in interest rates means that your monthly mortgage payment could go sky high.

This type of mortgage is best suited for homeowners that have more flexibility in their budget and during times of dropping interest rates when you don’t expect to live in the house for very long. This way, the homeowner is not in trouble when his or her monthly payment increases and often if interest rate drop dramatically, a refinance to a fixed mortgage may be prudent.

Playing the field safely

Generally, when comparing the risk to reward ratio for the two types of mortgages, it is usually better to lock into a fixed rate mortgage.  If the interest rates do drop significantly, then you can always refinance and capture the better rate.  Although there will be fees and finance charges for the refinancing, this often is offset by the benefits in your interest rate.  In addition, a fixed mortgage rate protects you against any increases in the interest rate market, which has been the catalyst for thousands of families in America losing their homes. 

Each homeowner must ultimately decide which mortgage suits their unique financial situation. A private mortgage company or a bank can help you to determine which type of repayment schedule will work for you. It is important to choose a type of mortgage that you are comfortable with and that will not leave you struggling financially each month. To make the best decision, talk with a financial advisor and discuss variable and fixed interest rate loans. Having said that, a golden rule of thumb, when choosing a mortgage, is to never go with a variable rate mortgage if it is the only way you can afford the house. The U.S. economy took a major hit in 2007 because people got in over their heads in an environment of easy mortgages in the sub-prime market.