What is the difference between a fixed rate and a variable rate?
Fixed rates remain unchanged for the entire term you have selected. You will not need to worry about payment changes, or market conditions. These rates are based on the bond market and will not need to be renegotiated until the end of your term. Variable rates are based on the prime rate. Most variable programs offer anywhere from .25%-.50% under the prime rate.
Payments on a variable term will usually be lower than that of the fixed terms, with many people opting to use their extra money to set their payments higher and pay down their principal faster. Interest rates that are based on the prime rate are not guaranteed to stay the same and will change whenever prime changes. Most lenders will offer you the ability to lock into a fixed rate term without penalty if prime begins to rise.
The other difference is the payout penalty on a fixed rate is 3 month interest penalty or Interest rate differiental whichever is the greater. This is on with all A lenders. On a variable rate the payout penalty is usually 3 month interest.
When you are dealing with some Alternative lenders the variable rate mortgage the penalty is 5 months on the 1st year, 4 months on the 2nd year and 3 months on the 3rd, 4th and 5 yr. On the fixed rate is is based on the bond rate not posted rate.