Which is a Better Mortgage Rate – Fixed Or Adjustable?

In the realm of mortgage – Toronto or elsewhere, there’s what is referred to as the fixed-rate mortgage and the adjustable rate mortgage (ARM). Therefore, when you will be applying for a mortgage to make that dream house a reality for you and your family, you need to shop for the best mortgage rate – Richmond Hill or just about anywhere.

Sometimes though, having the best mortgage rate is not that easy. There is even no exact science that demonstrates what would be the best mortgage rate for you. There is no universal rate. Because just like everything else, the best rate for you depends on the situation. This means that you can consider your mortgage rate “best,” if it addresses you needs.

So which is really better: fixed-rate or adjustable rate mortgage? Let’s examine the definition and advantages – as well as the disadvantages – of each.

Fixed-Rate Mortgage

A fixed rate mortgage is a loan that imposes one interest rate throughout the term. Usually, a loan of this kind of mortgage rate runs for 30 years.

The primary advantage of this kind of mortgage comes from the fact that your monthly/yearly amortization is friendlier. This is obvious considering that the number of years that you have to pay for your loan is higher. Elementary math tells us that a greater divisor will always give us a lesser quotient. Indeed, $100,000 divided by 30 years is lower (3,333.33) than $100,000 divided by 10 ($10,000).

But this has a downside. Any business-minded individual won’t allow others (strangers mostly) to use their money without anything in return – a profitable one at that. Therefore, money that is lent to someone else for a longer period of time will always bear a large interest.

Adjustable Rate Mortgage

On the other hand, an ARM is one wherein the interest rate varies. The change in the mortgage rate depends on a few indices. Naming these indices would be too technical for this write-up; just know, however, that in an ARM, the interest rate changes and is not constant throughout the term of the loan.

An ARM also has a shorter term. This means then that interest rate is slightly lower (1/4 to 1/2 of a percent) than that in the fixed rate.

Comparing the Two

While your amortization in an ARM is significantly higher than that of a fixed rate mortgage, in the long run, you can save if you go for the former. It is always advised for anyone to go for a shorter loan – lesser interest rate, shorter stress over impending payables, shorter time to wait before you can finally call that house your own. This is the reason why experts recommend a shorter loan.

But if you cannot afford a higher amortization and you are not in a hurry, then there’s really nothing wrong with going for a fixed rate mortgage. Yes, you may be paying for a higher interest, but this is price for taking things slow, for returning you lender’s money at a later date – and this should be a price that you are willing to pay for.