Just as you have worked your way through those countless decisions and when you have finally found your dream home, your lender throws another mind-bender question ' do you want a fixed-rate or variable interest rate home loan?
To understand the difference between the two, look at what each of those options offers and what problems or risks each carries:
Fixed-Rate Home Loans
Fixed-rate mortgages are the less common option these days. The concept is simple ' your interest rate will not change during the life of your home loan. The biggest benefit of a fixed-rate mortgage is the fact that it offers stability. You will always know exactly how much you will be paying in principal and interest on your loan.
However, fixed-rate home loans are a risk to you as the borrower. You are essentially betting that interest rates will not drop during the life of your mortgage. Keep in mind that even a percentage point or two can reduce or add to your monthly payment significantly considering the large loan amount of mortgages.
Also, if you want to pay more than the required payment such as to pay off the mortgage early or want to re-finance to take advantage of a considerable interest rate drop, your lender will charge huge fees.
Variable-Rate Home Loans
Variable interest rate home loans are the most popular option despite the unpredictability of how much interest borrowers are going to pay at any given time. If you are expecting interest rates to drop during the life of your mortgage, a variable-rate home loan can save you a lot of money.
A variable-rate home loan offers a big advantage to the lenders because they know they will always be able to charge you the highest current rate that new mortgages are going for. They will never be trapped into charging you less interest than the current industry standard, so variable-rate home loans offer more freedom.
If you are not completely comfortable with choosing between a variable-rate home loan and fixed-rate mortgage, you can choose to combine the two in a split-rate home loan. This simply means that a portion of the amount borrowed will accrue interest under a fixed rate and the rest will accrue interest under variable rates.
No matter what type of interest rate you choose, it is important to choose wisely and with forethought. Trying to change from one type of interest rate to another will usually involve a large fee from the lender which may completely offset any financial benefits you would otherwise have derived.
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