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What’s the Difference Between a Fixed Rate Mortgage and a Variable Rate Mortgage?

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Fixed rate mortgages offer the security of knowing your interest rate will not change during the duration of the loan, making them ideal for borrowers who want assurance that their payments won’t change. Common terms for fixed-rate mortgages are 15 and 30 years; however, shorter-term options exist as well.

Variable-rate mortgages offer the advantage of variable interest rates that can change with market conditions. Your rate is set according to a variety of factors, such as changes in the Treasury bond market and mortgage lending industry trends – which can be very unpredictable in volatile markets. Because your monthly payment and rate on a variable-rate mortgage may differ significantly month to month, it becomes harder for you to budget your home expenses and stay on top of overall finances.

Arms typically feature a low introductory rate that lasts for the first 5, 7, or 10 years of the mortgage, and then adjusts to an interest rate higher than that introductory rate during any remaining time on the loan. While this may save you money in the short-term, it could end up costing more in the long run as your rate increases – particularly if you plan to remain in your home after this initial period is over.

Variable-rate mortgages often feature a discount point, which is an upfront fee you pay to reduce your rate. This can reduce interest costs and give you a better loan deal overall.

If you’re searching for a home with an extended term, fixed rate mortgages are your most cost-effective solution. These loans typically come in terms of 30, 15, and 20 years; some lenders even provide up to 50-year terms.

On a fixed rate mortgage, your monthly payment is calculated by dividing the total amount owed at the end of every month by both interest and principal. Over the life of your loan, more of your payments will go toward repaying principal, while less will go towards interest payments.

Your interest rate will be determined by the index your lender uses. Some use an average of rates across the country to calculate their index, while others favor a particular rate that has historically fluctuated this way.

In addition to your index rate, your lender may add a percentage on top of it in order to calculate an effective interest rate. Some lenders will defer adding this percentage until after the end of your introductory rate period; others will incorporate it from the beginning.

The “lender discount” is a component of your full interest rate that may enable you to secure higher rates than otherwise possible. Furthermore, lenders may provide other incentives like no closing costs or reduced fees.