Fixed rate versus variable rate mortgage: which to choose?

When choosing a mortgage one of the most important decisions that you will have to make is whether you want a fixed rate or a variable one. They both have their advantages and their disadvantages so there are no easy answers. You will have to decide which you are most comfortable with.

The main advantage that a fixed rate mortgage has is that you know what you are going to pay each month. Since the interest rate is fixed the amount that you will pay stays the same. Over the last few years a lot of people with variable rate mortgages got into trouble because they couldn't afford the increased payments when interest rates went up. Having a fixed rate will keep you from buying a house that you really can't afford and should give you more peace of mind.

On the other hand, studies have shown that historically having a variable rate mortgage will save you a lot of money. There have been some studies that have shown that people who have taken variable rate mortgages over the last fifty years have saved tens of thousands of dollars in interest. The reason is that the interest rate that you get is lower than that for the fixed rate. Unless interest rates go up by quite a bit that will remain true. Even if interest rates do start to go up you can always refinance your mortgage and lock in a fixed rate before they go too far. The risk however is that if you don't budget for the increase in interest rates it can be a real financial strain having to make the higher monthly payments.

While historically it has been better to take a variable rate mortgage there are times when this is not the case and now may well be one of them. The best time to take a fixed rate mortgage is when rates are very low so that you can lock them in before the rates go up. Since interest rates are about as low as they can possibly get right now it would seem like now would be a good time to take a fixed rate. However this may not actually be the case.

The problem with locking in a fixed rate right now is that you will pay a higher interest rate than if you were on a variable rate. This would make sense if you were expecting rates to rise which surely they must since they can't go down any further. But it may be years before this happens, the economy is in real trouble and maintaining low interest rates may be necessary to stimulate it. That means that you can probably stay on the variable rate and pay lower interest for a few years yet before you have to worry about locking in a fixed rate.