Buying a home is one of the most important investment decisions a person makes in their life. It is not easy to collect a large sum of money, so a mortgage is the life saving option. Understanding the types of mortgages available is crucial for making an informed decision. This guide will compare fixed-rate mortgages and adjustable-rate mortgages (ARMs), detailing their differences, advantages, and which one might be right for you.
A fixed-rate mortgage is a type of loan in which the mortgage rate stays the same for the entire duration of the loan. This stability means that your monthly payments will not change, making it easier to plan your budget.
With a fixed-rate mortgage, you lock in a specific interest rate for a term, most commonly 5 years in Canada. For instance, if you borrow $100,000 at a 4.74% interest rate for a 5-year term, your monthly payment might be around $2,090.13. Monthly payments remain stable, but the portion allocated to principal and interest shifts: in the early years, more of your payment goes toward interest, while later payments focus more on reducing the principal.
In Canada, an adjustable-rate mortgage, often called a variable-rate mortgage, has an interest rate that can fluctuate based on the prime rate set by your lender. These mortgages typically start with a lower interest rate compared to fixed-rate mortgages and can be ideal for short-term savings.
With an adjustable-rate mortgage (ARM), you start with a low interest rate, which means your monthly payments are also lower at the beginning. For example, if your starting rate is 4.5% for the first five years, you’ll pay less each month compared to a fixed-rate mortgage.
However, if the prime rate goes up, your interest rate can increase as well. For instance, if your rate increases from 4.5% to 5.5%, your monthly payments will also go up.
Some ARMs have fixed monthly payments, which means you’ll pay the same amount every month. But if interest rates rise, less of your payment will go toward paying off the actual loan. This means you might not pay down your mortgage as quickly.
Feature | Fixed-Rate Mortgage | Adjustable-Rate Mortgage (ARM) |
---|---|---|
Interest Rate | Stays the same throughout the loan term | Can change after the initial fixed period |
Monthly Payments | Predictable and stable | Can vary, leading to potential increases |
Risk | Low risk | Higher risk if interest rates rise |
Complexity | Simple to understand | More complex due to terms and conditions |
Choosing between a fixed-rate mortgage and an adjustable-rate mortgage involves weighing each option’s pros and cons. Fixed-rate mortgages offer stability and predictability, which makes budgeting easier. On the other hand, ARMs come with potential risks from payment increases.
Before making a decision, consider your financial situation, how long you plan to stay in your home and current market interest rates. A mortgage broker can help you find the right mortgage solution tailored to your needs.
Whether you prefer the stability of a fixed-rate mortgage or the flexibility of an ARM, Alpha Mortgage House Corp is here to help. Our expert mortgage brokers in Surrey and Vancouver work with top lenders to find financing that suits you. Contact us today to discuss your options. Or, check your eligibility for a mortgage that fits your life.
Alpha Mortgage House Corporation is a Mortgage Broker in Surrey, BC. We provide mortgages for Home Purchases, Project financing, Second mortgages, Commercial mortgages, Mortgages for first-time home buyers and more. Alpha Mortgage is a one-stop solution for all your mortgage needs. Our team works with top lenders to provide you with the best financial options.
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