Ever wondered why so many people are opting towards fixed-rate loans, in comparison to variable mortgages? Well, the fact that those offer peace, security and stability in mind in an unstable housing market plays a huge role in having such a situation. However, it does not end up there. There are so many other factors, benefits and disadvantages to each mortgage type that brings us to the current situation in the battle of fixed versus variable mortgages. Have you decided the winner for yourself? If not then let’s have a look at each one of them to be able to find the answer for ourselves.
Variable Rate Mortgages:
A variable interest rate, often also called “floating” or “adjustable” rate, is a loan or security interest rate that has various fluctuations over time, considering the time that its basement of benchmark interest rate or index that varies periodically. The variable interest rate index or the underlying benchmark interest rate is dependant on the type of security or loan mainly associated with the federal funds rate. In short, this is a type of a rate that often moves up and down along with an index or with the rest of the market.
When looking at the big picture it’s important to consider the pros and cons of this mortgage type to be able to compare it with a fixed interest rate.
Benefits: One of the best assets to variable rates is its feature of flexibility. This mortgages type gives you the opportunity to be safe and not worry on things such as changing your monthly mortgage repayment, make an early payment of your mortgage, or switching to another leader. It gives you an open space to act according to your financial situation on the cases listed above, which in some situations can be more preferable or even less stressful.
Disadvantages: When choosing this mortgage type you have to take into consideration that changes in interest rates are not easy to predict and a lot of modifications can happen in a period of 20 or 30 years mortgages term, which means that you have to be ready to put yourself into a financially vulnerable situation, by going with this type of mortgage. In other words, variable rates do not offer you predictability and stability. Obviously, there is always a chance that your rate may go down, but at the same time, there is also a lot of change that the opposite will happen and it will go up, which may cause you several financial inconveniences.
Fixed Rate Mortgages:
Simply put, the fixed-rate home equity loan is a one lump sum payment type of loan. As the name itself suggests, in this type of rates your interest rate will remain the same; your interest rate is fixed. This rate does not depend on the changes and fluctuation of the market rates. IN short, choosing this rate type will result in you having the same payments over the entire term of the mortgage. Whether this rate type is the best for you depends on many factors and the specific situation you are considering to take it in. Here are some aspects of its “good” and “bad” sides to take into consideration before making a final decision.
Benefits: Obviously, this mortgage type brings certainty, security, and stability compared to variable mortgages. The fact that you will always know the exact fixed amount you are going to pay monthly can help you plan your finances, and monthly budgeting, releasing the worries over some extra payments. In a sense, this has more chance to bring some peace to your mind.
Disadvantages: Let’s take an example to better understand some of the shortcomings of this rate type. Let’s say you are taking a mortgage for 10 years. In this case with a fixed interest rate, you end up paying more than you otherwise could because there is a chance that interest rates can fall over that period of time. Moreover, another disadvantage of this mortgage type is that it contains several penalty fees, in case you would like to increase your monthly repayments in a certain stage.
Now that you have more or less a complete understanding of the difference, advantages, and disadvantages of each loan type it is time to apply those to your specific case and decide the winner of rate vs variable rate mortgage battle for yourself.