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The Mortgage Checklist - Part 5 (Variable Rate Mortgages)

If you're applying for a mortgage, there are some things you will need to know.  As a result, we have created a mortgage checklist, so you can ask your lender/broker the right questions.  Here is part 5 of 9, featuring questions about VRMs.

Variable-rate Mortgages

24. Does your variable rate mortgage have any restrictions?

Some variable-rate mortgages prevent you from porting or blending your rate, prevent increases and have fewer prepayment privileges.

25. Can I fix my payment so that it doesn't move if rates increase?

If so, and rates rise, more of your payment goes to interest. If rates fall, less of your payment goes to interest. Note that most fixed payment variable mortgages have "trigger rates." If prime rate increases so much that it exceeds the trigger rate, the lender will boost your "fixed payment."

26. How fast does the lender increase rates when prime rate rises?

Some lenders, like ING, adjust their variable rates every three months, which keeps your rate lower longer. (This delay works against you if rates drop)

A few lenders offer capped-rate variables with a ceiling on how high your rate can go. These are usually a bad deal if you do the math.

27. Can I convert my variable rate to any of the lender's fixed rates, at any time?

Remember, you'll rarely get the best fixed rate when you convert. Moreover, it's impossible to successfully time interest rates over the long run. For those reasons, do not go variable to save money in the short run, hoping to lock in "at the right time." Variables are a long-term strategy.

28. If I convert my variable rate to a fixed rate, will I get the absolute lowest rate the lender offers for that term?

Typically you won't. Lenders know you'd have to break your mortgage and pay a penalty. Most use that as leverage to offer merely average rates on conversions.