Adjustable Rate vs. Variable Rate Mortgages: What Are They, and Should You Get One?
mortgage Oakville

When applying for a mortgage, two options that are available to you are adjustable-rate and variable rate. This blog post will give insight into each option to help you make an educated decision about which is better suited for you. 

Variable-rate and adjustable-rate mortgages are attached to the prime rate, however, only adjustable-rate mortgage payments will fluctuate with every change in the prime rate. Variable-rate mortgage payments stay the same for the length of the term in a rate decreasing or a rate increasing environment making it easier to budget for monthly cash flow purposes. Due to the riskiness of the product, adjustable-rate mortgages often come with lower interest rates than variable-rate mortgages. Your rate can increase or decrease, and if you want to know exactly what your expenses will be every month, an adjustable-rate mortgage is not for you as you may find the changing rate challenging to manage. 

There may be a cap with your adjustable-rate mortgage, and there are different types you need to be aware of. An initial adjustment cap will define how much higher or lower your rate can go up after the first five to ten years. A subsequent adjustment cap will determine how much higher it can go up every time, which can be one or two percent every few years, and this can add up over time, so you have to take this into consideration. There is also a lifetime adjustment cap which signifies how much higher your interest rate can go up, although there is a limit in terms of how much your loan can go up over time. 

While an adjustable-rate mortgage is unpredictable, this option has several benefits, including a lower interest rate, which you will get right off the bat. This lower interest rate would allow you to put more money towards your principal at the start of your mortgage, which will help you build equity faster. Furthermore, adjustable-rate mortgages help ensure that you are on track to pay off your mortgage within your amortization schedule, ie. within 25 or 30 years. Since adjustable-rate mortgage payments increase or decrease with the prime rate, this ensures that the principal portion of your payment will not be affected.

In contrast, with a variable rate mortgage, since your payment will stay the same over the length of the term, if prime increases, you will be paying less towards principal and more towards interest and vice versa if prime decreases. This could become problematic in an upward trending rate environment as you may end up owing upwards of thousands of dollars at the end of your term since your payments were not paying off enough principal to keep up with the amortization schedule agreed to at the beginning of the term. 

When deciding between adjustable or variable-rate mortgages, you must carefully consider the pros and cons, and the Grover Mortgage Group experts will help you make an informed decision. If you are having difficulty deciding between the two options, do not hesitate to give us a call because our brokers are always ready to help. We will discuss your options in great detail to ensure you get the right loan, so if you are looking for reputable mortgage brokers in Oakville, contact us today!

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