One of the most common term issues that prompt a mortgage refinance is the difference between a variable rate and fixed rate loan. There is only one very basic difference between the two. A variable rate loan is exactly what it sounds like. The loan payments vary from month to month and the borrower pays whatever amount is designated by the current prime interest rate (a consensus among certain lenders of what interest rates should be). There are several negative points associated with a variable rate mortgage.



The first and most inconvenient is that you never know exactly how much your mortgage payment will be this month. Payments may remain fairly steady, but there will always be some variation. Depending on the terms of your loan, you may find yourself paying late fees or incredibly high interest on any portion of the payment you fail to make – even if it’s an oversight because you didn’t know how much the payment should have been. Some people want the stability of fixed rates, and that’s one reason to seek a mortgage refinance with a fixed rate.

One reason variable rate mortgages were so popular a few years ago is that interest rates were fluctuating wildly. While rates remain fairly steady today, there’s always the possibility that interest rates as a whole could skyrocket. That’s another reason to seek out a mortgage refinance. If interest rates were to become unstable, you’d know that your loan was locked in to a specific rate. Of course, locking yourself into a particular rate also means that you don’t get to take advantage of the situation when interest rates overall dive. It’s up to you to decide whether it’s worth the risk.

Sometimes, a borrower found themselves locked in to a variable rate mortgage because they didn’t qualify for the better loan terms. If that’s your case, you may find that you qualify for better terms after paying regularly on the existing loan for a period of time. If you’ve made payments on time every time and have demonstrated your ability and willingness to meet the terms of your loan, your lender may be ready to offer you better terms. In that case, you may be able to trade in your variable rate mortgage for a fixed rate mortgage, and a mortgage refinance may be a very good option.