Mortgage Rates- Fixed or Variable?

Fixed Rate Mortgages

Fixed Rate Mortgages lock in your interest rate for the full term of the mortgage. Since the rate and payments are set in advance, they give you peace of mind knowing exactly what your payments will be for the duration of the term. Most fixed rate mortgages are closed (with prepayment privileges), but there are some short term open fixed rate mortgages available as well.

Variable Rate Mortgages

A Variable Rate Mortgage typically ties your interest rate to the lender's Prime Rate, with either a premium over or a discount under that amount. Your rate and payments are set at the beginning of the term, but your rate can fluctuate with the lenders Prime Rate. For example, if you arrange a mortgage at Prime + 0.4%, and the Prime Rate is currently 3.00%, your effective rate at the time would be 3.40%. If prime rate goes up to 3.25%, your rate will change to 3.65% (Prime +0.4%). Payments are typically set at the beginning of the term, so if rates go down, more of your payment goes towards principal. If rates go up, more of your payment goes towards interest. If there is a substantial increase in interest rates, your pre-set payment may not be large enough to cover the total interest costs. If that happens the lender reserves the right to increase your payment.

Variable Rate mortgage rates tend to be lower than fixed rate mortgages, but you lose the security of knowing what your rate will be for the full term. Most variable rate mortgages are closed, but there are a few lenders that offer Open Variables at a higher premium over Prime Rate.

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