What is a Variable Rate Mortgage?

We all know that the mortgage market all around the world is not in the best of shape right now. However, it is not completely frozen. There are still people applying and being accepted for mortgages in Australia and the rest of the world. And, as always, they have been given two mortgage options to choose from. One is the variable rate home loan and the other is the fixed mortgage interest rate.

A fixed mortgage rate is a home loan where the interest rate and monthly payment stay the same for the life of the fixed interest term. So if your payment is currently $1200 a month it will still be $1200 a month at the end of your loan. But the variable rate mortgage is an entirely different beast.

The variable rate mortgage

The variable rate mortgage is the type of mortgage where the rate will change throughout the life of the loan. Actually, it will increase.

This is the type of loan that individuals will take because they cannot afford the high payment of a fixed rate mortgage from the very beginning. They like the lower payment in the beginning because they're pretty sure that they will be able to pay the higher rate in the future due to pay raises, career changes, etc.

Some blame the variable rate mortgage for the mortgage situation throughout the world. Home owners took out variable rate mortgages but were unable to afford payments when the interest rate increased. Although this can be true for some people,it isn't so for all. There are plenty of individuals who were able to pay their variable rate mortgages. The trick, however, is being certain you can handle any increase in payment amount. If you are able to handle the larger amount, you can avoid a large balloon payment at the end of the loan. This is normally something that is part of a fixed rate mortgage. A balloon payment is a lump sum payment at the end of the loan and some individuals simply refinance that part of the loan or they may refinance the entire home. A variable rate mortgage may help you reduce the size of any balloon payment.

So how can you determine if you're able to handle it?

Well, think about how much you can afford now. Could you nearly afford to have a fixed rate mortgage? If so, then there is a chance you will be fine when the rate increases. However, it is hard to tell what is going to happen in the future. The only thing that is certain is that the future is uncertain. But if you stay on top of things, you should be okay. This means familiarizing yourself with the loan. This means knowing when the rate is going to increase so that you can be prepared. When you are prepared, you can cut corners where you need to cut corners and you can ensure that your income flow is what you need it to be when the time comes.

Should you go for it?

Whether or not you choose a variable rate mortgage is entirely up to you. No one can change your mind. Just make sure that you understand everything there is to understand about the loan. It is those who don't understand the loans that really mess up in the end, but those who do understand are the ones who are able to adapt to the changes that occur.