Choosing Between A Fixed Rate Mortgage (Frm) Or Variable Rate Mortgage (Vrm)

By Adrianna Notton

These two types of loans are the main choices a person has when looking for a loan with which to purchase a home. Making the choice of a fixed-rate mortgage (FRM) or variable-rate mortgage (VRM) is not an easy one to make. A lot of money could depend on the choice you make and both are excellent ways of financing a home loan.

Both the fixed and the variable rate will work to determine how much money is paid in interest over the term of the contract. It then needs to be determined which of the two will best fit your budget. Is the sure thing the best option or does the variable offer more benefits?

Neither option alters the payment itself, but rather the amount of interest you will pay each month and the amount that is applied to the principle. Most know that banks and lending institutions will take their money first. Simply put, the largest amount of the payment is applied to the interest with little going on the principal. Over time the interest drops and the principal payment increases.

If you plan on living in your home for more than a few years, the fixed interest might be your best option. The bank will still take their share first, but the payment remains the same for the duration of the mortgage. Nothing will change from the time loan papers are signed until the amount is paid off.

A variable note also has a fixed payment, but the interest can fluctuate over time. The borrowed amount can be for one year up to ten years. The usual time period is three or five years. Many lenders offer interest so low the buyer is enticed by the low monthly payments.

Some things should be kept in mind by the borrower when contemplating a VRM. It will take a bit of mathematics but worth the effort. Evaluate if the amount of money saved over the initial period is worth taking the chance that payments will rise due to higher interest. Also, if this is a starter home and you only plan on living there for a short time, the VRM may be what you are looking for.

The VRM can also end up with the payments dropping. The recent economic downtrend has seen most ARM’s dropping at a fast rate due to lower prime. Still the applicant must decide that if the payment increases, can their budget handle higher payments.

A few percentage points may not seem like much, but spread out over the term of a mortgage, thousands of dollars can be saved. Your lender will let you know the pros’s and con’s of each mortgage, and the final choice will be the applicants. Both offer excellent terms and even if the interest should rise, the variable mortgages are capped at a certain amount. This means that if the rate increases, it cannot increase over a set number of points. FRM or VRM, the choice is yours and you can’t go wrong.

About the Author: If you are looking to buy a new house, you might need help with the mortgage Toronto. Contact the brokers specializing in mortgage rates Toronto and deals. These mortgage brokers will be able to help in managing your mortgages.

Source: isnare.com

Permanent Link: isnare.com/?aid=990997&ca=Finances