A mortgage is a tool, and using it the right way can save you thousands
All information in this article is applicable only on an individual basis pending a lender’s approval and OAC.
In an earlier blog we broke down exactly how fixed, variable, and adjustable rate mortgages all differ, so today we really want to go in-depth on exactly how a variable rate can* be less expensive for a borrower than a fixed rate mortgage.
- Variable rate mortgages will generally start out cheaper, with a lower interest rate
- Eventually, a variable rate mortgage can (and usually does) become more expensive than a fixed rate mortgage over time
- The main benefit of a variable rate mortgage is that in the short-term it’s cheaper, and if you think the market will go down, you can potentially save more on interest
- The main benefit of a fixed rate mortgage is that it’s consistent. You don’t have to worry about either paying down less of the principal each month or your monthly payment increasing
How it Works
In our guide here we discussed exactly how a variable (and adjustable) rate mortgage works. Lenders use an internal index rate that they use to base variable mortgages rates on. When this rate goes up, so will the interest rate on your mortgage, if it has a variable rate. As outlined above, most often a variable rate mortgage will start out cheaper than a fixed rate mortgage on the same property under the same market conditions. The trade-off is that generally over time the variable rate will go up, and eventually become more expensive than a fixed rate over the term of the loan.
How You Can Take Advantage
While this doesn’t make sense for every borrower, what you can** do when buying a home is get approved for a variable rate mortgage, and then as the interest rate rises, refinance into a fixed rate mortgage. This allows you to take advantage of the lower initial interest rate of a variable rate mortgage, without the same long-term carrying costs. This can be tricky to get right, however, which is why we don’t recommend even thinking about this unless you’re working with a broker that you trust. You have to make sure to account for any penalties for breaking your loan agreement early, legal fees and processing fees for the new loan, and whether or not it will save you enough money to make it worth going through the process.
Getting a mortgage is a complex process, and we want to support you! If you’re ready to buy a home for the first time, or you need to refinance your variable rate mortgage to a fixed rate, get in touch with us here! We’ll give you industry-leading customer service, and make sure that you get the loan that’s right for you, not the lender.
*All financing is available pending a lender’s approval and OAC
**California Lending Company cannot guarantee any future interest rates or financial forecasts