What Is a Floating Rate Mortgage?
The process of buying a house can be long and complicated, with many different choices to make. One of the most significant is deciding what type of mortgage you’re going to need based on your specific situation. While you won’t need to make the final choice until after you have found a home, it’s a good idea to start evaluating your choices early on.
There are two main types of mortgages to consider: fixed-rate mortgages and variable-rate mortgages, also known as floating. A fixed-rate mortgage provides the borrower with an interest rate that remains constant throughout the entire lifetime of the term. A variable-rate mortgage implies fluctuating interest, which means that your mortgage payments will also fluctuate.
With a variable-rate mortgage, the interest rate attached to the loan is subject to change as the economy and housing market changes. Each month, a set amount will be paid toward the mortgage principal, but the amount applied to the interest may fluctuate. There are a number of reasons why choosing a variable interest rate may be a good choice. They’re typically easier to qualify for than fixed-rate mortgages and, for many, choosing this type of mortgage is a necessity in order to qualify for the home they want to purchase.
Variable or floating mortgages also commonly provide buyers with a lower initial interest rate. In some cases, these rates are locked in for the first year of the mortgage and then subject to change thereafter. It’s important to understand that the interest rate of a variable-rate mortgage can change dramatically and quickly. Often, borrowers who choose a variable rate are caught off-guard when their mortgage payment drastically increases. Professionals have started calling this “payment shock” and, for some people, it can become difficult to make their monthly payment.
If you choose a variable rate, you must be prepared for the possibility of a rise in your monthly payment. If you set aside money to allow for monthly increases, you’ll be fine. Talk to a mortgage broker to discuss which type of mortgage rate is best suited for your specific situation.