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Home > Fixed vs Variable vs Adjustable Rate Mortgages – A Complete Guide

Fixed vs Variable vs Adjustable Rate Mortgages – A Complete Guide

March 5, 2020 by mthomas Leave a Comment

Different Mortgages Suit Different People

It’s undeniable that mortgages are complex. Every lender has different products with different rates, fine-print, and requirements. And taking a step back from the finer details, there are differences even between the way interest builds up on your mortgage depending on the type! There are fixed rate, variable rate, and adjustable rate mortgages, and they all have their own benefits and potential drawbacks.

Fixed Rate Mortgages

A fixed rate mortgage is the most common, and the most straightforward: your interest rate is an agreed upon figure that stays the same over the term. If your mortgage funds with a rate of 3%, then it will stay at 3%. This obviously has the benefit that your monthly payments will stay the exact same, and if you lock in a low interest rate, you’re able to benefit from that for years. The only downside to a fixed rate mortgage is that if rates drop, your rate stays the same, and you miss out on potential savings. Granted, this can be fixed with a refinance or switch, but those processes take additional time and may result in further fees.

Variable Rate

As the name implies, a variable rate mortgage is a mortgage whose rate can vary – it’s very straightforward. The lender will base the rate on an internal adjustment index – usually expressed as a percentage – plus an additional fee. For example, a lender might offer a product that is their internal adjustment index plus 1.5%. The benefit here is that variable rate mortgages generally start out significantly cheaper than fixed rate options, although their rates will usually eventually rise and become more expensive as the lender’s internal adjustment index goes up. Similarly to fixed rate mortgages, variable rate options’ monthly payments do not actually change – the only thing that changes is the balance of the loan, meaning you may pay off your mortgage slightly faster or slower depending on market changes.

Adjustable Rate

While it might seem that adjustable and variable rate mortgages are the same, they actually differ in one key way: monthly payments. Unlike a variable rate mortgage, where monthly payments do not change as the interest rate fluctuates, the monthly payment of an adjustable rate mortgage can increase or decrease in tandem with the rate. This means that you might find yourself paying a few hundred dollars less or more after the lender adjusts their internal index. Adjustable rate options are much like variable rate mortgages in all other respects, including that they can offer cost savings early on.

We always recommend that you consult a mortgage professional before making any big decisions regarding your mortgage – you could end up saving money, and get a mortgage that truly fits your lifestyle. 

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Michael Thomas is one of the leading Mortgage Brokers in California. He manages his files directly and keeps his clients updated every step of the way. A Real Estate Broker as well, Mr. Thomas is extremely well versed with the purchase transaction process. As a lifelong resident of San Diego with a Master’s Degree in Business Administration, he’s uniquely qualified to help Californians achieve their real estate financing goals.

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