WHAT’S THAT? FIXED RATE?
Is a fixed rate right for you?
One of the central issues surrounding the purchase of a home is interest rates. There are numbers here, numbers there, numbers numbers everywhere. But what do they mean, exactly? You might think a quick trip over to Google would help, but it’s pretty easy to come away just as confused as when you started.
According to Wikipedia:
“A fixed-rate mortgage (FRM), often referred to as a “plain vanilla” mortgage loan, is a fully amortizing mortgage loan where the interest rate on the note remains the same through the term of the loan, as opposed to loans where the interest rate may adjust or “float.” As a result, payment amounts and the duration of the loan are fixed.”
If you’re like most people then your response was probably similar to mine, something along the lines of “whaaaaaaat? Or, you started thinking about ice cream round about the words “plain vanilla” and lost your train of thought. Mmmmm, ice cream.
Put simply, when you agree to a fixed rate you know how much interest you’re going to pay for the length of the contract. No matter what the Bank of Canada does, no matter what you do, no matter what happens to property values in your neighbourhood, you have the peace of mind of knowing exactly how much money you’re on the hook for.
HERE’S A FIXED RATE EXAMPLE OVER TIME:
If you take a fixed-rate at 4.0%, that means the lender will charge you exactly 4.0% each year on the amount you borrow. No more, no less – 4.0%. Four cents for every dollar. Borrow $100 today, owe $104 after 365 days. Four per cent. Period.
Of course, a house, townhouse, or condo costs much more than a hundred dollars – and simple versus compound interest will factor in so we’ll explain those concepts later on – but for now, don’t let the size of the loan cloud your understanding of how the loan works.
Because you’ve agreed to this fixed rate, you can predict exactly how much your payments will be. In our example above, it’s 4.0% per calendar year. This is a good option when a tightly planned budget is the most important thing in your household.
To find out what the fixed rates are in your area right now you can always do a quick web search, but be aware that random web searches don’t always turn up the best results. Alternatively, you can talk to someone like your friendly neighbourhood mortgage broker (hey, that’s us!).
In future blog posts we will tackle terms like interest (the amount of your payment that goes to the mortgage), principal (the amount of your payment that goes toward the house) and more complex concepts like amortization.