People often shop for mortgages, hoping to beat the competition and get a lower interest rate. But understanding the value of fixed and variable interest rates can help ensure you're getting the best deal possible. Variable and fixed interest rates are two types of interest rates on loans.
With this, you can check out Great Southern Bank’s fixed rate home loan to help you in every area of your finances. Understanding the differences is important to help you make an informed decision about which type of rate best fits your financial goals. Let's get started.
Fixed Rate Loans vs. Variable Rate Loans
Fixed-rate loans offer a predictable rate for an entire term rather than fluctuating with changes in the market. This loan does not change in price if rates change and will remain the same throughout the life of the loan. A fixed rate allows borrowers to have standardized monthly payments, reducing transaction costs and helping avoid missed payments, so you don’t have to worry about having your credit rating ruined.
Fixed-rate loans are ideal if you want to minimize the risk of fluctuating interest rates. Interest rates stay the same for an entire period, so there’s no need to stress whether your bank will increase its variable rate sooner or later. The borrower has the security of knowing exactly how much they will owe every month and when their debt will be paid off. Regarding your financial future, a fixed-rate loan is a way to go.
On the other hand, variable-rate loans, also called floating-rate loans, are loans with an interest rate that varies according to market rates. With this type of loan, your monthly payments will change as your interest rates fluctuate.
In a variable-rate loan, you pay back the interest only when you reach a specified minimum balance. Interest rates are usually higher than fixed rates and tend to be locked in for a period of time.
Variable interest rate loans are popular for those who want to borrow more than their fixed-rate mortgage at the time of purchasing a home. Typically, a variable rate loan can fluctuate with the market, with some offsetting the risk of being late on a payment. Additionally, payments may be adjusted based on settlement or appraisal income or even experience changes in an individual's life.
Which Is Better?
Variable rates can be attractive to consumers because it allows the borrower to close their loan and exit fixed-rate mode when market conditions pose a risk of rising interest rates. Fixed-rate loans are more predictable, but with a little more knowledge about how your monthly payments will change as the interest rate environment changes, you can avoid surprises.
A variable rate of interest is better when there's a variable rate for a mortgage. A fixed mortgage is great if you have many debt payments and want to minimize the risk of rising interest rates. However, a borrower trying to make more significant purchases in the future may be better off with a variable mortgage that can invest in other assets.
A variable interest rate is your best option if you prefer a lower interest rate. If you prefer having higher rates, then a fixed interest rate is the one to go with. Everyone’s situation is different, and the number of factors that go into your financial decisions will be different than another person’s. Therefore, your personal choice should play a large part in deciding which of these two options is best for you.
Loans Suitable for You
Making the right loan decision can be challenging. That is why to decide on the best loan option for you, it’s important to understand the differences between fixed and variable interest rates. Fixed rates are known to be more stable and predictable, while variable rates can be lower or higher than the initial balance you accrue. Both fixed and variable interest rates are options for borrowers – but each has its benefits and drawbacks. Choose wisely.
References:
Variable vs. Fixed Rate (investopedia.com)
Fixed or Variable Interest Rate: Which is Best? | ISL Education Lending (iowastudentloan.org)
