Let’s say a homeowner is choosing between a 5-year fixed or variable rate mortgage.
The fixed mortgage rate offered at the time is 3.50%, with monthly payments of $2,240, while the variable rate mortgage is 3% and has monthly payments of $2,000. With a variable mortgage rate, the monthly payments are $240 lower every month, allowing the homeowner to have more financial flexibility.
But, with a variable rate mortgage, things are subject to change. Let’s say, over time, the interest rate has increased by 0.5% to 3.5%
If the homeowner has variable payments, their monthly payments would increase to match the interest rate increase. But, if they have fixed monthly payments, their monthly payment would remain at $2,000. However, more of the payment would be used to pay the increased interest, meaning less would be used to lower the outstanding mortgage loan and it will take longer to pay off the mortgage in full.