What Is A Variable Rate Mortgage?

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We all know that the mortgage market all around the world is not in the best of shape right now. However, it isn’t actually totally frozen. There are still people applying and being accepted for mortgages in Australia and the rest of the world. And, as always, they have been given two mortgage options to choose from. One is the variable rate home loan and the other is the fixed mortgage interest rate.

A fixed mortgage rate is a home loan where the interest rate and monthly payment stay the same for the life of the fixed interest term. So if your payment is currently $1200 a month it will still be $1200 a month at the end of your loan. But the variable rate mortgage is completely different.

The variable rate mortgage

The variable rate mortgage is the type of mortgage where the rate will change throughout the life of the loan. Actually, it will increase.

This is the type of loan that individuals will take because they cannot afford the high payment of a fixed rate mortgage from the very beginning. The low payment at the start is attractive because they believe they can pay a higher rate down the track, counting on pay rises etc.

Some blame the variable rate mortgage for the credit crisis around the world currently. Home owners took out variable rate mortgages but were unable to afford payments when the interest rate increased. Although this can be true for some people,it isn’t so for all. There are plenty of people who were still able to fully pay off their variable rate mortgages. The trick, however, is making sure that you are able to handle the increased payment. If you are able to handle the larger amount, you can avoid a large balloon payment at the end of the loan. This is normally something that is part of a fixed rate mortgage. A balloon payment is simply a lump sum left to pay at the end of the loan and some home owners will refinance that part or may even refinance the entire home. A variable rate mortgage may help you reduce the size of any balloon payment.

So how do you know if you can handle it?

Well, think about how much you can afford now. Could you nearly afford to have a fixed rate mortgage? If so, then there is a chance you will be fine when the rate increases. However, it is hard to tell what is going to happen in the future. The future is very unpredictable. But if you stay on top of things, you should be okay. This means you must fully understand your loan. This means knowing when the rate is going to increase so that you can be prepared. When you are prepared, you can cut corners where you need to cut corners and you can ensure that your income flow is what you need it to be when the time comes.

Should you go for it?

Whether or not you choose a variable rate mortgage is entirely up to you. No one can tell you otherwise. You need to be sure that you fully understand everything there is to know about the loan. It is those who don’t understand the loans that really mess up in the end, but those who do understand are the ones who are able to adapt to the changes that occur.

 

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