Fixed Vs Variable Mortgage Rates

Variable Rate Disadvantage

All variable rates are essentially introductory rates. Though mortgage rates rarely spike from a low introductory rate to a stratospheric rate, like many credit cards, it's important to remember even a small increase can add hundreds of dollars per month on many mortgages. For example, a one percent increase on a 250,000 dollar loan equals a little over two hundred extra dollars per month. Even an increase of just a few percentage points can price many families out of their own homes, which is the big variable rate disadvantage.

Though rates are usually guaranteed not to fluctuate for the first two to three years, a rate shock can hit borrowers as soon as the guarantee period ends, and if they cannot absorb the increase, they may be forced to sell the home. For this reason, variable rates are not suited for individuals planning to remain in a home for more than a few years. In a down real estate market, variable rate mortgages can lead to foreclosure because when the borrower is faced with a rate shock, the home may lack the equity needed to complete a sale.

Continue reading to learn about how to choose between these two types.