About Interest Rates 101

What is a Variable Interest Rate?

 

A mortgage in which payments may fluctuate every month depending on the prime rate (Some refer to as the overnight rate). If the interest rate goes down, more of the payment goes towards the principal amount on your mortgage. If rates go up, more of your payment goes towards paying off the interest.

The Pros:

 

- Historically lower than fixed rates

- Capitalize on lower prime rates

- Lower monthly payments mean increased cash flow

- Borrowers can lock into a fixed rate at any time

- Breaking a variable rate mortgage is usually only 3 months of interest

The Cons:

 

- Uncertainty due to potential change in cash flow

- Amortization could potential change

- Borrower need to stay up to date with current prime rates

What is a Fixed Interest Rate?

 

The interest rate is fixed between a term of 6 months - 10 years. There is peace of mind knowing that your monthly payments will always be the same.

The Pros:

 

- Your rate and monthly payments are the same for the whole term

- Timed with your amortization period

The Cons:

 

- Typically higher penalty if mortgage is broken

- Historically higher rate than a variable rate

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