Thursday, December 10, 2015

What you need to know about Variable Rates


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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