What is a fixed rate mortgage?

In Credit by CreatingWealthYoung0 Comments

A few weeks ago I reviewed what a variable mortgage was. Today, I want to provide an overview of what a fixed rate mortgage is. Similar to a variable rate mortgage, a fixed rate mortgage comes in two varieties; open and closed. Some of the main differences between a variable mortgage and a fixed rate mortgage include the interest rate and prepayment costs. A fixed rate mortgage, whether open or close, has a constant interest rate throughout the term of the mortgage. This means the interest rate you secure doesn’t change for the term of your mortgage regardless of economic conditions.

An open fix rate mortgage can be paid off in full at any time without any prepayment penalty (cost to break the mortgage).  Since the mortgage can be paid off in full at any time, you can expect a higher interest rate compared to a similar closed rate mortgage.

With a closed fixed rate mortgage, it’s possible to pay off the mortgage at any time, however, you will incur prepayment cost. The prepayment cost calculation for a fixed rate mortgage is a little more complicated than the standard 3 months of interest on a variable rate mortgage. I will be writing a blog dedicated to this calculation but for now, just know the prepayment cost are usually higher with a fixed closed rate mortgage.

Choosing a fixed rate mortgage might be a good option if you would like to keep your interest rate fixed throughout your mortgage term. If you believe you might pay off your mortgage before the term but still want a constant interest rate, then an open fixed rate mortgage might be a good option to consider. While a fixed closed rate mortgage will secure you the best interest rate, the associated prepayment cost are much higher than a variable or an open fixed rate mortgage.

Similar to my advice on the variable rate mortgage option, it’s really important you pick the right mortgage option that suits you best. Don’t feel pressure to pick a fixed rate mortgage option if it doesn’t fit or meet your needs. Take the time to determine which mortgage option is the best option for you.