Fixed Rate Mortgage In Canada | To Go For It Or Not
Deciding to obtain a mortgage on your home is probably one of the most important decisions you will make in your life. The next important decision is to decide what type of mortgage will be suitable for you – the Fixed Mortgage Rate or the Variable Rate Mortgage. This is never an easy decision as there are no clear cut answers to the question. Home mortgages usually last for long terms such as 5 years or 10 years. Explaining Fixed Rate Mortgages
If you opt for a fixed rate mortgage Canada (FRM) your rate of interest gets locked for the entire duration of the loan. You negotiate with your mortgage lender and fix the rate of interest in advance. Opting for such a mortgage provides you with the knowledge of what your monthly outgo will be throughout the next 1 year, 5 years, or 10 years, depending on the duration of your mortgage.
If the mortgage interest rates are low at the time you are considering your loan, then going for a fixed mortgage rate Canada is the best option you have. Your payments remain fixed, even if the rates of interest hit the roof. You choose the term of the duration that suits you – either 1 year, or 5 years, or 10 years. You can opt to pay an additional payment each year – some mortgage lenders allow you to pay a maximum of 20% of your initial mortgage once a year. You also have the option of increasing your payments each year – by up to 15%-20% once a year. This will lead to paying off your loan much faster.
Fixed Mortgage Rate Canada is most popular, especially with the laymen; the first time home buyers; and those who are not comfortable with, or do not understand, fluctuations with mortgage interest rates. Moreover, as many as 75% of all home mortgages are available on fixed rates. As the interest rate will never change during the lifetime of the mortgage and nor will the monthly payments, it will allow you to budget your finances for your household and other expenses much easily.
Pricing Of FRMs
Being predictable, the fixed rate mortgages are popular despite the fact that the rate of interest charged for it is always higher than other types of mortgages, such as adjustable rate mortgages. This is because of the inherent risks in the rates of interest. The longer the term of mortgage, the higher will be the rate of interest. Just because the fixed rate mortgage has a higher rate of interest, it does not make a bad option at all.
If the rate of interest of mortgages rises, an adjustable rate mortgage will cost you higher, whereas the higher rate will have no effect on the interest rate of your Fixed Mortgage Rate Canada. Your interest rate and the monthly payment amount will remain unchanged. This is a risk your mortgage lender has agreed to take, and that is why you were charged a higher rate initially.
One advantage, if the rates fluctuate to very lower levels, is that you can go for refinancing of your mortgage. This will enable you to reduce your monthly payments. However, you need to keep in mind that it entails more closing costs.
Though you have the option of choosing a 1 year, 5 year, or a 10 year mortgage for your home, you need to assess which may be the best for you.
Consider this: if you are considering mortgage when you are in your thirties, a 1 year mortgage term may not be suitable because of the higher monthly outgo. If you are considering a 10 year mortgage, you may still have loan on your hands as you approach your retirement age – an uncomfortable thought. In such a case, a 5 year mortgage may be appropriate for you.
A lot, of course depends on your individual circumstances.
What if your wife is pregnant and not in a position to contribute to the monthly payments? Possibly, a 5 year mortgage may be more appropriate, with lower monthly payments and cost of bringing up the baby?
You have a potential of saving on your Fixed Mortgage Rate Canada, and your decision to go for it will depend largely on the loan term, the current rate of interest, and the chances of the rate of interest on mortgages increasing or decreasing during the lifetime of your mortgage.