When you take out a home loan, one of the most significant decisions is going with a fixed or variable interest rate. Both interest rates have advantages, but they also have different risks involved with each one. This blog post explains the advantages and disadvantages of fixed and variable interest rates on a home loan.
Variable Rate vs. Fixed Rate: The Basics
There are three things to know about interest rates when it comes to taking out a loan:
- They are recorded in percentages. Therefore, a variable interest rate will change.
- The interest rate on a variable mortgage varies due to market forces and is open to fluctuation. The interest rate on a fixed mortgage does not change because the rate is agreed upon in the initial mortgage agreement.
- The exact rate you’ll have to pay will be determined by other factors, including your credit score, the amount of money you put down, your loan’s term and the type of mortgage you’re getting.
The Certainty of Fixed Rate Interest
Fixed-rate interest allows you to have a predictable monthly payment. Since the interest rate won’t change, you won’t have to worry about how your monthly payment will be affected by changes in the interest rate or your ability to make payments. When you take out a fixed-rate mortgage, you’ll know how much you’ll be able to afford each month, which can help you plan.
Many people choose to take out a fixed-rate mortgage because they want the steady payments that come with a fixed rate.
The Risk of Variable Rate Interest
Variable-rate interest may be a good choice for you if you don’t know whether you’ll be able to afford the payments each month or if you don’t want to add a fixed rate to your mortgage. With a variable rate mortgage, there are some things that you can’t predict, such as the interest rate that you’ll have to pay.
Let’s say the interest rate changes, and suddenly you’re unable to make your monthly payments. The lender has the right to demand that you make higher payments, which means you may have to sell your house. However, if you have a debt to pay off, you may have to settle for a short sale.
The Benefits of Fixed Rate Loans
Fixed-rate loans can be beneficial in the following ways:
- They offer security because they help you plan ahead. Since you know exactly what your payments will be, you can get a better idea of what you’re able to afford.
- They offer a predictable schedule. Fixed-rate loans have a set interest rate, which means you can rely on your mortgage payment staying the same.
The Benefits of Variable Rate Loans
Variable-rate loans can have several positive benefits:
- They allow you to change the terms of your loan. In some cases, you may be able to buy a house when you wouldn’t have been able to get a mortgage with a fixed rate,
- They give you more flexibility. Since you can change the terms of your loan when it comes to the interest rate, you won’t be locked into a specific rate for the life of your loan.
Conclusion
Fixed interest rate loans offer you the luxury of knowing your monthly payment. You can rely on a fixed interest rate loan to help you save money and plan for the future. Variable-rate loans may come with risks, but they can give you the flexibility you need to get a house when the economy is in a downturn or if you want to adjust the terms of your loan quickly.
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