There are two basic kinds of Edmonton Mortgage rates, fixed or variable. What determines the differences is how the interest on the loan is structured. In a variable loan, the percentage of interest applied to the principal can rise or fall. In a fixed rate loan, the interest rate does not change over the entire loan repayment period. Knowing the difference can help you decide which type of loan works best for you.
Every loan is made up of two parts. The principal is the original amount that you borrow. This is the cost of the property, plus any additional expenses financed into the purchase price. The second part is the interest charged for the use of the money until the loan is repaid. Most loans are structured so that a portion of the payment the borrower makes goes to satisfy the base amount and a portion to the interest.
The way the banks figure out how much interest to charge is they take an agreed upon percentage of the principal and add it back to the loan. Knowing that variable interest rates may change while fixed rate loans do not is an important distinction when choosing between types of mortgage loans. This can make an impact on good financial planning for the future.
Through the financing period, the interest paid on a fixed rate loan is constant. Market conditions can vary a lot during the life of a mortgage, but this does not affect the rate charged a fixed rate loan. In order for it to change, the borrowers must refinance the loan. The time span of the loan is predetermined as well.
If you desire predictability, a fixed rate loan may be a good choice for you. Since the amount that is paid to the principal is pre-determined, many borrowers can plan for their financial futures with greater security. The loan is not affected by sudden swings in the overall market place.
If the prime rate increases or decreases, the interest on a variable rate loan will change as well. The amount of the mortgage payment does not vary. Instead, the portion of the payment that satisfies the original debt versus the amount going towards interest can change. There are too many unknowable factors that allow anyone to know for sure what future interest rates may do. Therefore, variable interest rate loans do carry higher risks.
With variable rate mortgages, the term of the mortgage, or length of time that the payments continue, is flexible. When the prime rate is high, more of the monthly payment goes to interest and not to repay the principal. If rates fall, the reverse is true and the debt would be satisfied in less time.
So, there are different rates for borrows to consider when choosing an Edmonton Mortgage. If you are tolerant of risk, a variable rate may be the loan for you. If security is a higher priority then you might consider selecting a fixed interest rate instead. Remember, it is always a good idea to consult with a professional who can answer all your questions and supply any additional information you wish.
Steve Fraser is an Edmonton Mortgage Broker. Learn the four critical questions you should ask when working with any mortgage broker when you download his free report, “The Insider Secrets to Protecting Your Finances and Getting a Money-Saving Mortgage Even if You Have Bad Credit,” from his Edmonton Mortgage Blog.
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