One of the basic tenets of personal finances seems to be this: If you’re going to get a mortgage, you should get a fixed rate. However, does it make sense to get a variable rate mortgage? My parents recently refinanced to a variable rate mortgage, and they were quite happy with the deal. And, since I’ve been stuck with my higher fixed rate, unable to refinance, I’ve sometimes wondered if a variable rate might have been the way to go.
Advantages of a Variable Rate Mortgage
There are two main advantages to the variable rate mortgage:
- The rate often starts out lower than what you see with fixed home loan rates. This can save you money up front.
- You can see a reduction in your loan payment if interest rates fall, saving you money throughout the term of the loan.
Of course, in an environment where interest rates are heading higher, you see an increase in payments. When the mortgage lender adjusts the interest rate every quarter (or after some other set time period), you could see an increase in your payments. You don’t have a stable mortgage payment with a variable rate mortgage. You run the risk of higher payments — and paying more overall — during the course of your mortgage term.
Protecting against Higher Mortgage Rates
There are ways to protect against significantly higher mortgage rates with your variable loan. My parents’ mortgage rate cannot increase by more than 0.25% each quarter, and there is an overall cap on the mortgage rate. The top rate that will be charged on their mortgage is still lower than the interest rate they were paying before with their fixed rate loan. There are ways to protect yourself against rapid increases to your mortgage rate, if you have good credit, and you search for a loan that works for you.
Who Can Benefit from a Variable Rate Mortgage?
If you want to benefit from a variable rate mortgage, it’s possible for you to do so. If you know you will be moving in the next few years, a variable rate can make sense, since you can get a lower interest rate, and pay less, while you are in the house.
Additionally, if you plan to pay off your mortgage faster, making extra principal payments, a variable rate mortgage can make sense, since you can take advantage of the super-low interest rates we are seeing now, and put more toward the principal to pay down the loan faster, and pay less interest overall.
In the end, you need to decide what is likely to work best in your situation. The current low-rate environment isn’t likely to change too rapidly anytime soon (although higher Treasury security yields as concerns about the debt ceiling mount could mean higher mortgage rates), so it’s up to you to determine whether or not you think you can find some lasting value out securing a variable rate mortgage, either for a new purchase, or for home refinance loan.