Why Variable Rate Interest Mortgages are a bad idea.
Ready to buy a house? Take a good look at the mortgages you are able to apply for. Shop around and find your best deal, because when the day comes that you have paid off your entire mortgage, you'll have paid more in interest that the price of your house.
Do some research before you decide what mortgage you are going to apply for. The two biggest categories are the fixed rate mortgages and the adjustable rate mortgages, also know as the variable rate interest mortgage.
When you have fixed rate mortgage you will always know what amount you are going to end up paying every month during the term of the loan. If you want to predictable payments for your loan the fixed rate mortgage is the best decision you can make, even if you have to pay that little bit more to get this assurance.
A variable interest rate mortgage has an interest rate that moves up and down. They usually start at a lower interest rate, which results in lower payments but these rates fluctuate based on the market interest rates. The variable interest rate will be adjusted each year and sometimes even more frequently. So when considering a variable interest rate mortgage you should sit down and think about the consequences. Yes, maybe you don't have to pay a lot right now, but how high are the rates going to be next year, in 5 years, in 10 years. Will I be able to do my down payments at that time?
I must admit variable interest rates can look very tempting at times. For example, if you have to choose between a fixed rate mortgage with a rate of 5.6 percent or a adjustable rate mortgage (ARM) with monthly rates starting at 1.25 percent. What would you pick?
Sure, we would all opt for the variable rate interest mortgage. But if we look to the future development of the loan, the picture gets a little scarier.
With an adjustable rate mortgage you could start out paying $1,250 a month during the first five years. You can have an ARM with a fixed rate during the first five years. Many forecasters expect the interest rates will rise over the next few years. So after the first five years of paying $1,250 a month, your interest rate is adjusted and... you will end up paying about $2,100 a month. Will you be in a position to do that? Will your income be high enough to cope with such down payment?
If you are sure you will have enough money over the years of the life of your loan, a variable rate interest mortgage can be considered, but in most cases there will be insecurity. You could be in for a serious shock if you choose to have an adjustable rate mortgage, because you can't possible know what the future brings to you. Sometimes it's better to be safe, than sorry.