What’s better, a fixed rate home loan or a variable rate home loan? There are pros and cons to each, so you need to weigh your options carefully before committing to one type of loan or the other. Fixed rate vs. variable rate home loans Which one is right for you.
The fixed rate home loan offers security that your monthly payments will stay the same over time, but it limits your ability to benefit from low interest rates if they rise.
A variable rate home loan lets you take advantage of falling interest rates if they go down, but you could end up with higher monthly payments than you might expect when the interest rates rise again in the future.
Should I get a fixed rate or variable rate home loan?
The truth of it is that fixed and variable rate mortgages are both beneficial to certain borrowers, depending on their particular financial situation.
At its core, a fixed-rate mortgage gives a borrower a stable monthly payment over time. While interest rates will rise with inflation, your payments don’t adjust (and they won’t increase because of rising property values or fluctuating interest rates).
If you’re confident in where prices are headed, then a fixed-rate mortgage could be a great option for locking in an affordable monthly payment now—or if your income might change significantly down the road and affect your ability to make payments if they were tied to those changes.
How Does Variable Rate Compare to Fixed Rate Home Loans?
Sometimes, life throws curveballs, and to make sure that you have your bases covered as much as possible, it’s important to compare what a fixed-rate mortgage offers versus a loan with an adjustable rate of interest.
The great thing about our modern society is that there are so many options available to us – whether in our careers or in how we handle our personal finances – and determining which option works best can be quite confusing if you don’t know what goes into each type of loan.
Do We Prefer Variable Rate Over Fixed Rate?
The answer may be quite surprising. The variable-rate mortgage has remained largely popular with homeowners across Canada and America, who generally prefer to avoid locking themselves into a high fixed rate when interest rates are poised to rise again.
If that isn’t reason enough to consider a variable-rate mortgage, there are a number of other benefits worth mentioning here—but there is also some potential risk involved in choosing such a mortgage.
By weighing both sides, it becomes easier to see which option will best suit your needs as an individual borrower over time, though it is also helpful to compare different quotes before making any final decisions as well!
What is an Adjustable-Rate Mortgage (ARM)?
An adjustable-rate mortgage (ARM) starts with a lower interest rate than a fixed-rate mortgage, but that interest rate will fluctuate based on financial factors like inflation or unemployment rates.
If there’s a dramatic change in those factors, your payments could go up dramatically – and there may be very little warning before it happens.
Fixed-rate mortgages keep your monthly payment stable over time, so you can make better financial plans based on what you can afford each month.
The interest rate may be higher, but if your income stays flat over time and doesn’t increase, then that additional money can be used to pay down debt faster or put towards other goals like retirement savings or college tuition down payments.
When to Choose a Variable Loan over a Fixed Loan
It’s an open question whether a fixed-rate loan or a variable-rate loan is better overall, as each has its own set of pros and cons.
On average, however, some homeowners have historically made out better with a variable-rate loan while others were able to save more money by going with a fixed-rate product.
Variable rates tend to be lower than fixed rates if interest rates are low (as they currently are). The way that works out in practice is that those who would likely benefit from a lower payment will get one if they go with a variable loan, while those who want stability in their payments can avoid interest rate risk by choosing a fixed product.
Is There Anything Bad About Variable Loans?
Despite their drawbacks, some borrowers may find that a variable loan could be a perfect fit—particularly if your budget can accommodate higher payments during a period of rising interest rates and if you have an emergency fund to tide you over during periods of increased financial stress.
For many people, starting out with a fixed-rate loan makes sense; however, in general it’s probably best to plan on refinancing at some point to get a better deal from your lender or from another lender offering lower interest rates and/or more favorable terms.
Why Are People Choosing ARMs Nowadays?
ARMs are an attractive option because, despite their higher interest rates, they have a lower monthly payment when compared to fixed-rate mortgages.
When mortgage rates drop (as they have in recent years), so do ARM rates, which means people who had been paying a high mortgage payment suddenly find themselves with extra cash at hand and a choice:
Should I keep my low monthly payment or refinance into a lower fixed-rate loan? The catch here is that those reduced payments come at a cost:
If mortgage rates go up (which they almost always do eventually), then your mortgage payment goes up too—and can go up to levels that were previously impossible.
Should I Consider ARM if I Have Good Credit Score?
ARM, or adjustable-rate mortgage, differs from a fixed-rate mortgage in that its interest rate adjusts periodically based on market factors.
But before we look at when and why to choose an ARM over a fixed-rate loan, let’s explore what it means to be fixed or variable.
With a fixed-rate loan, your interest rates and monthly payments are consistent for an agreed upon period of time (15 years being standard).
This can be appealing because if your salary remains unchanged or your family situation does not change, you know how much you will need to spend each month on housing well into the future.
The Truth about Interest Rates, Payments, and Fees
The interest rates, monthly payments, and fees on a fixed-rate mortgage are known in advance because they don’t change over time like they do with a variable-rate mortgage.
However, that certainty comes at a cost—fixed-rate mortgages tend to be more expensive than those with floating rates because their lenders are taking on more risk by locking in an interest rate (and thus monthly payment) far into the future when other market factors may have changed (e.g., oil prices).
Still, if you plan to stay in your house for years or just want to be prepared for any major changes in global markets, it’s best to get a fixed-rate loan; plus, as noted above, there are tax breaks associated with that choice.
What Is CHFA’s Advantage V Loan Option?
With CHFA’s Advantage V Loan Option, people who would otherwise be denied a mortgage loan because of a credit issue can purchase a home with as little as 3% down payment and no closing costs in some states.
Fixed monthly payments are calculated by adding principal, interest, property taxes and homeowners’ insurance to your required reserve contribution (3% of purchase price), which means that your monthly payment doesn’t change.
For example, if your balance on an Advantage V loan is $250,000 with a fixed rate of 4%, then your monthly payments would be $1,169 per month until you pay off your mortgage loan in full (or refinance it).