Fixed Rate Mortgage
When you agree to a fixed rate mortgage, your interest rate will not change during the term of your mortgage. There are no surprises as you’ll always know exactly how much your payments will be and how much of your mortgage will be paid off at by the end of your term. At the end of the term, if there is still a balance and time left on your amortization period, the lender will normally offer a renewal with a choice of a new term and the interest rate available at that time.
Variable/Adjustable Rate Mortgage
When you agree to a fluctuating interest rate for the length of the term, then you have a variable rate mortgage. Interest rates fluctuate with the bank’s prime lending rate, and may vary from month to month. When interest rates change, your payment amount remains the same, however, the amount that is applied to the principal will change. For example, if interest rates drop, more of your mortgage payment is applied to the principal balance owing. With some lenders, if the interest rate changes, the payment amount will automatically change to reflect the change in the interest portion of the payment.
With an adjustable rate mortgage, the payment will automatically adjust when there is a change in the prime interest rate. This will ensure that enough money will be paid toward the principal amount each payment to have the mortgage paid off at the end of the amortization term. Whether your lender refers to it as a variable rate or an adjustable rate mortgage, it is important for the borrower to understand if the payment will automatically change, or if the payment will remain the same when the interest rate changes. The variable rate (adjustable rate) mortgage is an option for homeowners who believe that interest rates are currently high and will drop.