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Fixed-Rate Mortgage (FRM) or Variable-Rate Mortgage (VRM): Select Best Choice For You

By Adriana Noton

If you are in the market for a home you will have to choose between a fixed-rate mortgage (FRM) or variable-rate mortgage (VRM). They are the two most popular ways of securing funds to buy the residence you will live in. Both offer excellent financing with a few variations in how they are handled.

Both the fixed and the variable rate will work to determine how much money is paid in interest over the term of the contract. It then needs to be determined which of the two will best fit your budget. Is the sure thing the best option or does the variable offer more benefits?

The amount you pay for a home is the principal. The money that the bank or financial institution will charge you for using that money is the interest. That is where these two loan types differ. With both, the bank will take their share of the money first. When making a payment more will be applied to the interest than the principal in the first few years. Over time, interest will drop and principal amounts will increase.

When a home purchase is made with the intent of living there for a long time, the fixed amount borrowed may be your best bet. The interest is predetermined and that plus the purchase price is spread out over a period of up to 30 years. Your payment is locked in and can never change.

A variable note also has a fixed payment, but the interest can fluctuate over time. The borrowed amount can be for one year up to ten years. The usual time period is three or five years. Many lenders offer interest rates so low the buyer is enticed by the low monthly payments.

Some things should be kept in mind by the borrower when contemplating a VRM. It will take a bit of mathematics but worth the effort. Evaluate if the amount of money saved over the initial period is worth taking the chance that payments will rise due to higher interest. Also, if this is a starter home and you only plan on living there for a short time, the VRM may be what you are looking for.

The recent economic trend is great for the present variable borrower. These recent years has seen the prime continually dropping and the variable payment has dropped right along with it. If that should changes, and interest begins to rise, the mortgagee has to be sure they can cover the payment without difficulty.

A few percentage points may not seem like much, but spread out over the term of a mortgage, thousands of dollars can be saved. Your lender will let you know the pros's and con's of each mortgage, and the final choice will be the applicants. Both offer excellent terms and even if the interest should rise, the variable mortgages are capped at a certain amount. This means that if the rate increases, it cannot increase over a set number of points. FRM or VRM, the choice is yours and you can't go wrong.

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