Fixed Rate or Adjustable Rate?

Here are the differences between fixed rate loans and adjustable rate loans, and some information to help you decide which is right for you.

 

When you're shopping for mortgages or refinancing loans, you may have heard about "fixed rate loans" and "adjustable rate loans," but you may be wondering what the differences are between these two options and whether a fixed rate or adjustable rate is the best type of loan for you.

There are several differences between a fixed rate and an adjustable rate, also called a variable rate, loan. Here are some of those differences, and some questions to ask yourself to help you make the best decision for your financial situation.

Fixed Rate Loans

· The interest rate on a fixed rate loan stays the same for the entire term of the loan, usually 15 or 30 years.
· The interest rate and monthly payment stay the same for the entire term of your loan, so you know exactly how much you'll pay every month, which makes it easier for you to budget.
· The interest rate stays the same no matter what direction interest rates are moving in the market.
· A fixed rate loan may cost more at first, but may cost you less over the entire term.
· A fixed rate loan is a good option if you plan to stay in your home for a long time.
· A fixed rate loan is also a good option if you expect that interest rates will be higher than they are now.

Adjustable Rate Loans

· The interest rate on an adjustable rate loan stays the same for a certain period of time, then "resets" to the prevailing market interest rate.
· The initial interest rate for an adjustable rate loan is sometimes lower than a fixed rate loan.
· An adjustable rate loan may cost less at first, but may cost you more over the entire term as interest rates change.
· An adjustable rate loan is a good option if you plan to sell your home or refinance into a fixed rate loan when the loan resets.
· An adjustable rate loan is also a good option if you expect that interest rates will be lower when your loan resets.

How Do I Decide?

Here are some questions to ask yourself to help you decide if a fixed rate loan or adjustable rate loan might be right for you:
· Am I most comfortable with a monthly payment that stays the same from month to month or a balance that changes every month?
· How long do I plan to stay in my current home?
· Do I expect interest rates to go up or go down?
· Do I expect to refinance my loan?
· Could I still afford to pay an adjustable rate loan if interest rates go higher?

 

These are general recommendations not applicable to all financial situations. Every financial situation is unique. Further, the suggestions and recommendations contained within the content provided are not an assurance of any future result. Be sure to discuss your specific financial circumstances with a legal or financial expert before you take action.