Variable rates are rates that
can fluctuate within the term of your mortgage. They are most commonly
offered on 5 year terms. Usually when I see lower term variables, it is a
special and comes with a certain length of time to close the mortgage, these
usually are 3 year terms. When rates change then so does the payment you
are making. For example, if your rate were to go up then your payment
would go up or if the rate went down then your payment would also go down.
Variable rates suggest a spread between the prime rate (Bank’s
Prime Lending Rate) and the rate you get.
So you might see prime -.50% which means you deduct 0.50% off of prime,
if the banks prime rate is 2.70% (which it is today December 2015), then your
rate would 2.20%. At times you could see
a variable which is prime + 0.50. This
means you would add 0.50% to prime which today would amount to 3.20% (2.70% +
0.50%).
Benefits to Variable Rates
-
In todays rate environment you can benefit from economic
uncertainty and the fact that Prime rate will likely stay low for a while
-
The prime lending rate could go down further
which would produce a lower payment
-
Most variables have a standard payout penalty of
3 months’ interest penalty which means there are usually no surprises. This is always in the mortgage
documents. I would refer to each lenders
policy to ensure this is the case
-
Freedom to convert your mortgage to fixed rate
anytime without any penalty
-
Risk vs. Reward can lead to great savings
Disadvantages to Variable Rates
-
Interest rates could go up would result in
higher payments
-
They are more difficult to qualify for, in anticipation
of higher interest rates lenders are required to qualify you on what is called
a benchmark rate to ensure if rates go up then you can still make your
payments. The Benchmark rate currently
sits almost 2.00% higher than that of say a fixed rate.
-
Sometimes lenders offer posted rates instead of
discounted rates when considering locking in the mortgage rate which can result
in a much higher rate than you may have gotten on a fixed in the first place.
-
Instability, not guaranteed to know what your
mortgage payments will be over the term
When considering what to do with rates it is always best to
consult with a mortgage expert, such as myself.
I will provide you unbiased information that will help you decide what
to select.
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