Fixed vs. variable interest rates, which is better?
What’s better, a fixed interest rate or a variable interest rate? Let’s take a look at the different definitions:
What is a fixed interest rate?
A fixed interest rate stays the same and does not fluctuate when interest rates rise or fall.. With a fixed interest rate loan, your payment will remain the same for the duration of the fixed rate term.
What is a variable interest rate?
A variable interest rate usually has a benchmark, and fluctuates as the market interest rates rise or fall. Mortgages with variable interest rates are referred to as ARM’s (Adjustable-Rate-Mortgages). With an ARM, the interest rate applied on the outstanding balance will vary throughout the life of the loan. The initial interest rate is usually fixed for a set period of time. After this initial period, the interest rate will reset periodically and can be as often as monthly or yearly depending on the terms of the mortgage. If interest rates rise, the interest rate on your loan will also rise and your payment will increase. When the market interest rate decreases, the interest on your loan will follow suit and your payment will decrease.
Both types of interest have pros and cons, finding the one that is right for you is important. Speaking with a financial advisor can help you gain the clarity you need to make the best decision. Not all lenders offer mortgage loans with both, fixed or variable rates, so it’s important to understand the loan programs and interest rate options that are available with any lender you are considering.
