Variable Rate

How to Save Money with Variable Mortgage Rates

There was a time when interest rates were fairly easy to predict. These days even a crystal ball might not help. One expert is predicting that there is still room for rates to drop. Another one thinks that they could skyrocket any day. I do know that whether you are contemplating buying your first home, or are about to renew your present mortgage, it does pay to shop around. There are some good options to consider that can help you cope with the uncertainties.

A unique option offered by some financial institutions is a protected variable rate mortgage. "Variable" means that the interest rate charged on your mortgage can change, usually monthly to correspond with the changes in the money market. "Protected" means that the mortgage also has a guaranteed maximum interest rate that is locked in for five years. You could say it's a chance to have the best of both worlds! On the one hand, you have the security of knowing that your mortgage rate will never exceed a predetermined rate and on the other hand, in a period of lower rates you also have the advantage of having your interest calculated on the variable rate. The variable interest rate on this type of mortgage is usually one percentage above the prevailing prime rate. So, if prime is six percent, the rate charged for that month would be seven percent.

So, how does this affect your payments? Your payments are based on the financial institution's five year fixed mortgage rate, (for example, *.95%), and will be the same for the duration of the term. The interest you are paying is calculated once a month at the current rate, (for example 7%). The savings comes about this way: the difference between the actual mortgage payments and the interest at the variable rate, (that difference being 1.95% in this case), is applied to your principal each month. All mortgage holders that I know, want to pay off their mortgage as quickly as possible. On a $100,000 mortgage, amortized over twenty five years, you could save as much as $11,000 over a five year period In fact, instead of the original twenty five years, your mortgage would be paid off in seventeen or eighteen years by taking advantage of a protected variable rate mortgage.

Most of us have neither the time, nor the nerves, to monitor the rise and fall of interest rates. So, if you are looking for security and peace of mind, look into a protected variable rate mortgage. Shop around and ask questions, because features vary in different financial institutions. Make sure you find the plan that meets your comfort level. After all, it is your mortgage!

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