FIXED VS. VARIABLE |
Fixed Rate vs. Variable Rate
There are several loan options to choose from when buying or refinancing your home. Each type has its benefits and disadvantages.
You should ask yourself several questions when deciding which loan option to choose:
1. How long am I planning on being in this home?
2. How much can I afford to pay monthly?
3. What type of payment will fit into my long-term financial plan?
4. What type of payment offers me the best rate for my current situation? Fixed Rate Loans
Among the loan options, the fixed rate loan works especially well for those with a fixed income who like the stability of knowing what their monthly payments will be. Many people choose a 15 or 30 year fixed rate because they believe in paying down their home as quickly as possible in order to own their home outright as soon as possible.
With a fixed rate loan, you know exactly what your monthly payments will be for the next 15, 20, 30, or even 40 years. This allows you to easily plan your budget and/or your retirement around your mortgage payment. When you reach the end of your term, you will have paid off your home mortgage and own it free and clear. Of course, you will still owe your insurance premiums and property taxes in perpetuity. Biweekly Fixed Rate Loans
Biweekly loans force you apply extra money toward your principal by making half of your mortgage payment every two weeks. If you do the math, you will see that you end up making thirteen payments per year instead of twelve, thereby reducing your principal early and shortening the length of your loan. Biweekly loans not only reduce the time it takes to pay off your mortgage, but they also reduce the amount of overall interest paid to the lender over the life of the loan. Variable Rate Loans
Variable rate loans typically offer lower rates than fixed rate loans. Most variable rate loans start out with a fixed rate for a specified length of time before becoming variable. These types of loans work well when you expect your income to increase dramatically over the next few years, or if you are planning to move from your house after a few years. The most common variable rate loan lengths are 3/1, 5/1, 7/1, and 10/1. The first number is number of years for which the loan remains at a fixed rate. The second number is the frequency (in years or months) at which the rate can adjust after the fixed rate period has expired.
If you would like a personalized and detailed explanation of any of the loan types mentioned above, please do not hesitate to call one of our knowledgeable staff for a FREE consultation!
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