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Tuesday, February 3, 2009

Why a Fixed-rate Mortgage May Be Better for First-Time Homebuyer

By Amy Nutt

It's not uncommon for someone to look for the lowest price on any purchase that they are planning on making - this goes double for a major purchase and definitely applies to Canadian mortgage rates. People look for the lowest monthly payment they can get on a car, on an apartment and on a house - often the lowest monthly rate, at least at the start of the loan, will be with an adjustable rate mortgage so a lot of folks jump on this in favor of paying a lower out of pocket than they would be paying on a fixed rate loan. This can work very well in some situations, but with the current state of the economy in Canada - this may not be the best option for a first time home buyer.

When Adjustables can be good

If you are only planning on staying in your new home for a very short period of time and the current trend with adjustable rate mortgages is substantially lower than that of the lowest fixed rate mortgage that you can qualify for then the adjustable rate mortgage could work out well for your situation - or if you're exceedingly confident that nothing will make the rates rise during the duration of your stay at the home it could also be the better option - but this is practically impossible to predict.

Some people don't mind the unpredictability that goes along with an adjustable rate mortgage, they don't get flustered with every little fluctuation of the market and can handle the up and down trends with confidence that their rate will rebound. Owning a home can be a stressful situation, especially if it's your first home - if you don't think you can handle the uncertainty of your monthly payment, which could constantly be going up and down, along with all of the other common stresses that go along with home ownership - an adjustable rate mortgage may not be the best for you.

The Pros of a Fixed Rate Loan

With a fixed rate mortgage, you know exactly what you are in for - there will be no secrets or surprises when your statement comes, you bill will remain the same each month. For a first time homeowner this can relieve a lot of the stress associated with the added responsibility of paying for a home. Before you sign your name to the dotted line you can sit down with all of the facts and figures and develop a budget that you are confident that you'll have no trouble paying. With an adjustable rate mortgage, this stability and confidence is impossible to have - sure your rate could go down, but if it goes up will you be able to still pay it? With a fixed rate mortgage this is a question that you won't have to worry about answering.

Some people will say that being bound to an interest rate for the life of your loan can be a bad thing. The truth of the matter is, that rates often do fluctuate - they go up and down, but having a fixed rate loan isn't like a life sentence in prison without the possibility of parole - if rates go down and stay down, you can consult your mortgage company about refinancing your loan to bring your current interest rate down. You may even be able to restructure your loan to pay less each month, while taking some equity out for necessary repairs or improvements at the same time. Locking yourself into a low rate should feel like a safety net, if you start seeing the rates drop after you've had your loan for a while - by all means, refinance and save yourself the money, but if the rates start to climb as the often do, you can rest easy that you are locked in at a good rate.

Your home should feel stable and secure, and with the current state of the economy in Canada things are very unpredictable. The best bet for a first time homebuyer is to compare mortgage rates for the lowest rate the can find and to lock it in for the duration of the loan - that way you'll be safe from any disasters that may occur in the near or distant future and free to make changes at a later date should they become necessary.

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