A 5-Year variable mortgage rate changes or fluctuates with the market interest rate, also known as the prime rate. The term, which in this case is 5 years, is the total length of time you will be committed to paying a variable rate. Your mortgage payment can be set in two ways using the variable mortgage rate.
Unlike fixed rate mortgages where the interest rate does not change for the entire mortgage term, variable mortgages expose you to possible changes to interest rates. That’s right. With a variable rate mortgage, your interest rate will be adjusted depending on changes to the market rates.
For example, if your mortgage payments are structured in a way that you have to pay a fixed amount every month, changes in interest rates will affect both the interest charged and the principal amount. Furthermore, your mortgage payment schedule will also be affected during the process.
Over the years, it is seen that variable rate mortgages are less expensive compared to fixed rate mortgages and this is not all. It is also seen that variable mortgage makes more sense when interest rates are falling.
If you feel that you will be breaking your mortgage contract within a couple of years, you can consider a 3-year variable mortgage term. Similarly, if you want to upgrade your home and don’t want to pay a hefty penalty for breaking mortgage contract, you can opt for a 5-year variable mortgage to save yourself a few bucks.
Well, not really. You can choose five-year variable mortgage for several reasons.
Variable rates do have a few disadvantages.
Variable-rate mortgages usually have two types of payments depending on the lender. The first type is where your mortgage payment can increase or decrease depending on the prime rate. These type of payments are known as floating payments.
The other payment type is called fixed payment and in this, your lender will keep your payment same for the entire term. However, if the market rate goes up, you pay more interest and less principal. In a majority of cases, the payment you make should cover the interest (amount to be paid) or your payment will be increased.
5-year Variable rate mortgages are high in demand when market interest rates are expected to drop low. Most mortgage shoppers choose variable term if the difference between fixed rate and variable rate mortgage is more than 1%. The difference historically has been 1.25%.