Home buyers can have difficulty choosing between a fixed rate or variable rate mortgage. The decision will depend on your tolerance for risk and your ability to withstand increases in your mortgage payments. Market conditions also play a huge factor in the choice between a fixed or variable rate.
Fixed rate mortgages appeal to people who prefer a conservative mortgage approach, manage tight monthly budgets, or want stability in their payments. Since 2018, fixed rates have been hovering near record lows.
Variable rate mortgages, however, allow the borrower to take advantage of lower rates, which are calculated on an ongoing basis at a lender’s prime rate plus or minus a set percentage. For example, if the current prime rate is 3.0%, the holder of a prime minus 0.5% mortgage would pay an interest rate of 2.5%. Owners of a variable rate mortgage can sometimes expect a financial benefit, but this will vary depending on the current economy.