Fixed or Adjustable – What Mortgage Rate is Better?

In the Toronto mortgage arena and beyond, there are fixed-rate mortgages and adjustable rate mortgages, or ARMs. So when you are ready to buy a home, you should compare shop to get the lowest mortgage interest rate.

However, finding a good one can be difficult because the rate all comes down to your individual situation. So a mortgage rate is only beneficial if it suits your specific needs.  This brings us to the question of which rate is better – fixed or adjustable? Before we answer this, it is important for you to understand the definitions and benefits of both.

Fixed Rate Mortgages

A mortgage with a fixed rate is one that keeps the same interest rate from the term’s start to finish, usually lasting 30 years. Its advantage is a friendly amortization on a monthly/yearly basis. This makes sense because you will spend a greater amount of years repaying your loan – a larger divisor produces a smaller quotient.

The disadvantage is that business owners are out to make a profit, if they lend money to a borrower for a longer stretch of time, there will be a bigger interest rate attached.

Adjustable Rate Mortgages

An ARM has a varying interest rate and the variations are dependent upon several complicated factors. However, an ARM comes with a shorter repayment term, meaning that it also has a slight lower interest rate than its fixed rate counterpart.

Comparison

Even though an ARMs have higher amortizations, you will save money with fixed rate mortgages. The shorter the loan period, the smaller the interest rate.  This means you can pay off your home loan quicker without worrying about jumps in your mortgage payment.

Of course, feel free to go with an ARM if the amortization is out of your budget and you plan to live in your home for quite some time.