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Choosing Between Mortgages

Author: Ryann Cairns

One of the most critical aspects to the process of purchasing a home, besides choosing the actual home, is deciding which type of mortgage will best suit the consumer. Most mortgages are made for 15 or 30 year loans. That can be a long time to be tied down to a payment. The loan applicant will need to take into consideration how much money they can qualify to borrow, how much they have to set aside for payments and whether they are comfortable taking a risk with a variable interest rate loan.

Many consumers want the reassurance they will be able to access the lowest interest rates at all times. A fixed rate mortgage will not allow this. With a fixed rate mortgage, the interest rate remains at whatever the prime rate was when the loan was originated, for the duration of the loan; even if that is 30 years. A variable rate mortgage loan offers more flexibility but also more risk. With a variable interest rate loan, the consumer will be able to take advantage of lower interest rates if the prime rate falls. This can be a substantial amount of savings over the course of the loan. There is a risk, however that the prime rate will rise, which means the homeowner will be paying more money in interest on the mortgage loan. The fixed rate consumer does not have this concern.

There is a compromise between the fixed rate mortgage loan and the variable rate mortgage loan. A capped loan allows consumers to access lower interest rates if they become available, but protects them from high interest rates above a certain limit. Another compromise is a discounted mortgage. In this type of mortgage loan, the consumer takes out a mortgage for a variable interest rate loan. While the interest rate will fluctuate in accordance with the current prime, the interest rate the consumer pays will always remain a certain number of points below whatever the current prime rate is.

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