Question

Differentiate between a fixed-rate mortgage and a variable-rate mortgage.

Short answer

In a fixed-rate mortgage, there is a uniform rate of interest during the entire lending period. On the other hand, in a variable-rate mortgage, the rate of interest changes with time.

Step-by-step solution

Meaning of Mortgage

A mortgage is a loan that is used to clear off a portion of the value of the property. It is compliance made between the lender and the borrower. The borrower obtains money from the lender to clear property and pays along with interest over a specified time period till the lender has been paid completely.

Difference between a fixed-rate mortgage and a variable-rate mortgage

Fixed-rate mortgages and variable-rate mortgages differ on the following grounds:

• The fixed-rate mortgage starts with a higher rate of interest, but the remittance could be lower than for a variable-rate mortgage in the coming years of the tenure of the loan. Whereas the remittances and the rate of interest can be lower than with fixed-rate mortgages in the initial period.
• Payments will be uniform throughout the tenure of the loan. On the other hand, payments could significantly increase and also become exorbitant, depending on the economy.