Fixed vs. Floating Rate

• When a person receives a fixed-rate mortgage, the size of her payments on the mortgage never change. However, under a floating mortgage, the size varies frequently, as the rate is tied to the current interest rate on the mortgage market. While a fixed-rate mortgage is more stable, variable interest rates may sometimes trend lower than fixed rates. A homeowner may therefore wish to switch to a floating rate to ensure she is not overpaying.
  
  

Refinancing

• The easiest way of transitioning from one kind of mortgage to another is to refinance the mortgage. This means that a lender agrees to pay off the existing mortgage and issue the borrower another one. When the new loan is issued, it will grant the borrower different terms. The exact rate that a borrower will be able to receive on this loan will depend on his current credit rating, with borrowers with better credit paying lower rates.
  
  

Considerations

• When a person refinances a mortgage, she often has to pay a prepayment fee to her current lender. The only way that a person would be unable to refinance would be if a lender was unwilling to extend a mortgage to the borrower because her financial situation was poor enough that the lender did not believe she would repay the loan. Therefore, a borrower with a bad credit rating may not be able to find another lender to buy up her mortgage.
  
  

Considerations

• In most cases, fixed rates are generally harder to receive than variable rates of interest. This is because, under a variable rate of interest, the lender is always receiving interest payments that exceed the current rate of interest. However, under a fixed interest rate, the lender may at times receive less in interest than the market currently commands. Generally, therefore, it is harder to transition from a floating to a fixed rate than the other way around.