Triston Rans - Calgary Mortgage Associate

Fixed Rate vs Adjustable Rate Mortgages

Can you explain the difference between a Fixed Rate and Adjustable Rate Mortgage?

When it comes to choosing a mortgage, Canadian homebuyers and homeowners now must consider an incredible array of mortgage types as well as contend with changing interest rates. With choices come decisions, and those wanting to acquire, renew or refinance a mortgage have to think carefully about the stability offered by a Fixed Rate mortgage vs. the risks and potential rewards of an Adjustable Rate mortgage.

In a Fixed-Rate mortgage, the interest rate is set and your monthly payment will remain unchanged for the life of the loan (your term is up, you pay off the mortgage, refinance or sell your home, whichever comes first).

By contrast, the interest rate of an Adjustable-Rate mortgage (ARM) changes with the prime lending rate – which means your payment will change too. If interest rates rise, your payments will go up. If rates fall, your payments will go down. Because you, the borrower, are assuming more risk (via changing payments), lenders are willing to charge you less interest. ARM’s are currently around a full percentage point lower than typical fixed rate mortgages. In fact, the Bank of Canada’s overnight lending rate hasn’t been this low since 1958, and some of Canada’s major banks expect even further rate cuts in 2009.

With a fixed-rate loan, your monthly payment of principal and interest never change for the term of your loan, making your monthly budget planning much easier. However if interest rates fall during your term, the only way to take advantage of a lower rate is to refinance your mortgage, and it may be costly to do so.

With an adjustable rate mortgage, history shows that you typically save on interest over time, and you will not need to refinance to take advantage of falling interest rates, as long as you can handle a payment fluctuation if they go up. Most lenders will allow you to convert to a fixed rate product at any time, so this type of mortgage does have a lot more flexibility.

Whether you choose the peace of mind with a fixed rate mortgage, or a potential savings advantage of an adjustable rate mortgage depends on your personal risk threshold. At the end of the day, there is no right or wrong answer. The best mortgage is the one that is best for YOU.

For more personal advice on your mortgage needs, please contact Triston Rans, at The Mortgage Group, at 571.8142 ext. 237 email tristonrans@mortgagegroup.ca. Or visit www.tristonrans.ca

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