The Pros and Cons: Fixed vs Variable Home Loans

by Emma

Buying a home is a big step in anyone’s life, but especially for a first-time homebuyer. However, a first-time buyer is often a first-time borrower, at least when it comes to a home loan. As you compare lenders, interest rates, and monthly payments, you’re often learning as you go. That being said, it’s important to study up the technicalities of a mortgage loan before you commit. Otherwise, you can easily end up in an unfortunate financial situation simply out of ignorance.

One of the most important features to consider is the interest rate of your new loan and, by extension, whether it’s a fixed or variable-rate mortgage. Both options come with perks and downsides, so it’s important to consider them carefully to make sure you’re getting the best option for your unique situation.

Fixed-Rate Loans

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Fixed home loan rates maintain a static interest rate through the life of the loan. No matter how the housing market fluctuates, your mortgage rate—and, by extension, your mortgage payment—will remain the same each month.

Why might you want a fixed-rate loan?

If you’re looking to take out a loan when the current rate is meager, a fixed interest rate will work in your favor. This option will also give you greater peace of mind than a variable mortgage rate, as there’s less of an inherent risk over time.

What may deter you from a fixed-rate loan?

When your mortgage rate is fixed, you’re gambling with yourself as the market won’t offer a lower interest rate going forward. A fixed interest rate is relatively inflexible so, even if others are seeing all-time lows, you’ll continue to pay more.

Variable-Rate Loans

As you can probably guess, a variable-rate loan is one in which the interest rate varies based on the ebb and flow of the market. As a result, your payments, too, will vary from month to month as your mortgage rate adjusts to the market rate.

Why might you want a variable-rate loan?

If the market interest rate is about to decline, a variable-rate loan will greatly benefit its borrower. A lower interest rate and payment, after all, is always a welcome bonus!

What may deter you from a variable-rate loan?

While a variable rate is great when market interest rates decline, the opposite is also true: when market rates go up, so does your mortgage rate. With a variable-rate loan, you’re ultimately taking more risk than with a fixed option—a fluctuating monthly payment and interest rate doesn’t have the same sense of security that a static, unchanging rate offers.

In some cases, you may even be able to get the best of both worlds with certain adjustable-rate mortgages. A 5/1 ARM is particularly popular, offering a fixed mortgage rate for the first five years before becoming variable. If you’re looking to sell your term in the shorter term or refinance your mortgage after just a few years, or if you expect your income to suddenly rise, this option can provide the security of a rate lock now with the flexibility of a variable rate down the road.

Various factors go into deciding whether a fixed or variable-rate loan is better for you. If you’re hoping for the lowest rate and monthly mortgage payment possible, you’ll want to look at the market rate, projections and compare the pros and cons of each type of loan. If you’re particularly risk-averse, you may lean towards a fixed mortgage rate. Conversely, if you’re optimistic about the market’s future or consult a financial expert who is, a variable interest rate may appeal to you. In any case, a first-time borrower or repeat homebuyer alike can benefit from taking the time to figure out which loan type is best for them.

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